Key Takeaways:
- With gold’s rally at a plateau, spot silver has begun to outperform during the past two months.
- Solar panel and EV industries are expected to keep boosting silver demand.
- Inflows toward ETCs exposed to precious metals are strong.
At a time marked by global uncertainty, the price of gold is close to record highs around USD 3,400. This has turned investor focus to silver, an alternative metal which has historically acted as a “multiplier” of the movements of gold.
“Silver historically goes through the gears some time after gold and looks primed to receive flow from long-only investors, as well as trend following futures buyers who are already in play in gold,” says Ned Naylor-Leyland, manager of the Bronze-rated Jupiter Gold & Silver Fund.
Bullish and bearish moments for these two metals usually occur simultaneously: silver tends to follow gold at the beginning but often ends up outperforming it during the entire cycle. Silver may currently offer greater opportunities than gold, managers say, but there are risks to that bullish outlook.
“There is plenty of room to run here and for long-only investors to get involved,” says Jupiter’s Naylor-Leyland.
Like gold, the price of silver is driven by real interest rate expectations because of their strong influence on the dollar. As the dollar has weakened against major currencies this year, this has made dollar-denominated assets like commodities more attractive to outside investors.
The main risk to silver prices could come from a surprise set of rate hikes from the Federal Reserve, adds Ned Naylor-Leyland, although market pricing currently suggests this is unlikely. “Conversely, should there be surprise cuts or dovish policy, that would likely benefit investors.”
What Is the Gold-Silver Ratio?
Another measure that helps investors is the gold-silver ratio, a calculation that shows how many ounces of silver are needed to buy one ounce of gold. Logically, the lower the ratio, the more expensive silver is relative to gold.
Currently, this ratio is around 91, which means that one ounce of gold buys 91 ounces of silver. Over the last 30 years, this ratio has averaged between 55 and 60, peaking at 123 at the coronavirus pandemic—as many investors sought refuge in gold—and reaching a low of 32 in April 2011. In general, the gold-silver ratio is considered high when it is above 80.
“Such a discount of silver relative to gold has occurred in less than 1% of the time since 1950. Given this undervaluation, silver appears well positioned to outperform gold in the event of a renewed surge in global industrial activity,” says Trevor Yates, senior investment analyst at Global X.
“In the coming decades, factors such as the rapid expansion of the solar panel industry—which makes extensive use of silver—are expected to sustain demand, given the growing need for energy generation capacity, which is in turn driven by structural megatrends such as electrification, urbanization, and the rise of artificial intelligence.”
Rhona O’Connell, head of market analysis at StoneX Bullion, is more cautious. “Increased political tensions favor gold and penalize silver in the event of further economic difficulties. In the long term, silver has solid fundamentals, but for now it has completed a retracement of the gains recorded in the first half June,” she says.
Silver is Both a Precious Metal and an Industrial Metal
Silver is not a pure precious metal like gold. Instead, it’s a ‘hybrid’ metal, halfway between precious and industrial, due to its multiple uses. It’s integral to green tech, electronics, electronic vehicles, and medical devices. Demand from the solar and EV sectors is driving usage to record levels.
“This combination makes it a potential safe haven asset and an asset that is, in part, correlated with the economic cycle,” says Global X’s Trevor Yates.
Over 70% of the world’s silver is mined as a byproduct because its deposits are often found together with copper, gold, and other minerals. “This has recently helped to keep prices well above the marginal cost of production,” says Yates.
“Even in the medium to long term, despite the sharp rise in prices, we expect rising capital costs, high inflation in mining costs (labor, machinery, etc.) and the scarcity of high-quality projects to continue to weigh on the supply outlook,” says the analyst.
On the other hand, because of its industrial nature, silver is tied to economic growth: A global slowdown, trade war escalation, or policy tightening could suppress demand.
