Signal Says Now is the Time to Buy Silver

Analyzing the highest gold-to-silver ratio on record

Senior Quantitative Analyst
Jul 22, 2020 at 8:19 AM
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Silver looks like it might be breaking out and, compared to the price of gold, it is long overdue. The chart below shows gold prices have run up fast since early to mid-2019, while silver meandered sideways for much of that time. Thus, gold is near its highest level since 2011, while silver has a long way to go before it reaches those 2011 levels.

Chart 1

According to our data going back to 1929, this is the highest gold/silver ratio we have ever seen. The chart below shows how this ratio has surged recently to well over 100. It’s the first time the ratio reached triple-digits since the early 1990’s. This week, I’m looking at how these assets have performed going forward based on these ratios. 

Chart 2

Returns When Ratios at Extremes

This table shows the typical one-year returns for gold and silver going back to 1980. Since then, gold has done slightly better than silver. It has had a slightly better average return, with higher percentage of returns positive. Also, it has been less volatile than silver. Next, I will look at what the returns look like when the Gold/Silver ratio gets extremely high and low.  

1 year returns

The ratio is currently at an extremely high level. In these situations, you would expect silver to outperform going forward, because that would return the ratio back toward more typical levels. The table below shows the return of each metal over the next year when the ratio was above 80.

Gold and silver both outperform their typical one-year returns. As expected, silver has been the better investment when the gold/silver ratio was extremely high. It has averaged a double-digit return with 65% of the returns positive. Also, the standard deviation of the returns has been lower when the ratio was above 80. Based on this, now might be an opportune time to buy silver.

2_1 year returns

Finally, I’m looking at what has happened when this ratio gets to the other extreme. In other words, a very low gold/silver ratio. When the ratio has been below 50, you would expect that gold has outperformed silver, but you would be wrong. Gold averaged a gain of about 5.5%, with 58% of the returns positive over the next year. That’s better than it has typically performed since 1980 but as far as the average return goes, silver outperformed. The average one-year return for silver after an extremely low gold/silver ratio was 7.5%. Less than half of the returns for silver, however, were positive.

3_1 year returns


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