Here’s a thought-provoking chart from Adam Zeal: the Gold-to-Silver ratio trend for the last few years.
During the 44 months leading up to the Great Stock Panic of 2008, silver averaged 1/55th the price of gold. This pre-panic 54.9 average was fairly tight too. It wasn’t defined by a few rare extremes, but many years of gentle meandering near the middle of a range between 65 and 45. Despite the countless market-moving gold and silver developments since 2005, this 55 average held nicely.
Incidentally, if you do any deep silver-stock or gold-stock research, the miners will often report equivalent numbers. A primary silver miner will take its byproduct gold production and convert it into silver ounces using the cash equivalent. A primary gold miner will do the opposite, converting its byproduct silver into the cash equivalent of gold ounces. In countless SEC reports I’ve waded through of gold and silver miners, this 55 ratio is usually the number they all use for equivalent calculations.
And over recent years, the variance in the SGR has actually decreased considerably as you can see above in the tightening wedge. All this leads me to believe that an SGR near 55 is far more normal for this bull market than the levels seen during the stock panic. As speculators fled everything including silver, its price plunged far more than gold’s. This drove the SGR to its lowest levels of these entire precious-metals bulls.
It was the plunging stock markets that drove this extreme universal fear. So silver fell to its lowest level relative to gold on November 20th, the very day the S&P 500 swooned to its lowest close of the panic by far.That day, silver at $8.92 was only worth 1/84th of the price of gold at $745! I had never imagined such a low SGR was even possible prior to that panic, and I am certainly not the only silver investor who was surprised by it. The panic blew apart all kinds of previously unassailable historical relationships.
And incredibly such an extreme wasn’t just a single-day anomaly. During the entire panic (September to December), the SGR averaged 75.8. This is just ridiculously low relative to silver’s history with gold. Gold was actually being bid up mid-panic as investors recognized that its performance was really quite good compared to nearly every other asset during the panic. But speculators, quaking in fear, refused to return to silver as readily as the gold investors returned to gold.
For a variety of reasons, I fully expect silver’s historic relationship with gold to normalize. It has existed for so long that a fear bubble in the stock markets lasting a few months shouldn’t be able to sever it forever. Nothing fundamentally changed on the silver or gold mining fronts during the stock panic, so the secular-bull pictures for both metals look similar today as they did back in July. And silver speculators will always be interested in the much larger gold market and watch it for clues on how to bet on silver.
At $900 gold and a normal historical 55 SGR, silver should be trading near $16.36 today. This is 30.8% higher than it was trading in the middle of this week! So even if gold does nothing, a simple mean reversion in the SGR to pre-panic levels implies a silver price much higher than today’s still-depressed levels. Until silver returns closer to its normal range relative to gold, the short-term case for this white metal remains very bullish.
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