Gold-silver ratio unlikely to normalize until yield curve steepens

New York (Sept 28)  While it seems there is pressure for the gold-silver ratio to normalize, we will unlikely see it go down as long as the yield curve remains near 0%.

The ratio is currently 85, which is 40% higher than the historical average of 60 over the last 30 years.

The chart below illustrates the long-term relationship between the gold-silver ratio (blue line) and the yield curve (orange line), as illustrated in this example by the 10-year minus 2-year U.S. treasury yield. Over the last five years, a definitive trendline has emerged, showing an inverse correlation between the two variables with a very strong correlation coefficient of 74%.

As the yield curve has gradually flattened over the last five years, the gold-silver ratio has steadily risen in conjunction.

The silver price faces pressure both upwards and downwards. On the one hand, global economic growth has declined in recent years, and silver’s industrial demand has seen headwinds as a result. According to the Silver Institute, silver’s physical demand peaked in 2015 and saw declines the following years, flat-lining after 2017.

While the overall industrial demand for silver has weakened, it is important to note that photovoltaic uses saw dramatic increases in silver demand during the same period but not enough to offset the losses in other industries.

On the other hand, fears of a coming recession have pushed the yield curve this year to negative territory for the first time since 2008. Both gold and silver prices rallied on the back of growing economic uncertainty, but silver failed to rise substantially more, as was expected, due to its higher beta to gold.

Some analysts and mining CEOs have speculated that silver’s underperformance this year was simply due to its lag relative to gold, and it is only a matter of time before it catches up to the yellow metal.

However, over the last five years, there have been few instances where the gold-silver ratio diverged from its negative correlation with the yield curve. The ratio dropped significantly in late August despite a flat yield curve, but then increased and showed signs of a re-convergence with the yield curve. Therefore, the data suggests that this normalization is unlikely to occur until the economic outlook improves.

KitcoNews