The gold-to-silver ratio is falling. What does this mean for the metals?

Gold and silver have seen spectacular gains over the last 10 years. Not long ago, the rise in gold prices over the past decade even outpaced the return on the S&P 500 index, but the index managed to overcome its challenges and reach new historical highs. Nevertheless, the return on the gold market in the last 10 years has been just over 190%, with a 27% increase this year, while for the silver market, it's a 152% increase with a 21% rise since the beginning of this year. The S&P 500 index, during the same period, grew by almost 200% and a mere 6% this year, respectively.

Of course, it's worth remembering that such strong returns on precious metals wouldn't have been possible without the correction after 2011, which was linked to expectations of significant interest rate hikes in the United States. Currently, the situation looks completely different, as gold is gaining even during a period of sustained high interest rates by the Fed. This means that a crucial factor behind gold's strength is its role as a safe haven. In recent years, many global events have prompted investors to seek protection for their assets. Equally important, central banks have also joined the ranks of those seeking safe havens, opting for stronger diversification of their reserves due to concerns about the stability and position of the U.S. dollar. Among the leading buyers in recent years, we can observe the National Bank of Poland. Over the past three years, central bank have purchased over1000 tons annually, accounting for over 20% of the total global demand for gold. It is expected that 2025 will be another year when demand from these institutions surpasses 1000 tons. Moreover, after several years of stagnation, we are also seeing a return to greater activity from ETF funds. Investors are purchasing new units in these funds, which requires ETFs to buy physical gold on the market if they employ such a hedging policy.

Silver is not purchased by central banks. It also has a completely different demand structure compared to gold. The vast majority of silver demand is generated by industry, including increasingly new technologies. In the case of silver, we have observed a clear market deficit for several years. Consequently, with the investment segment also waking up, an even larger deficit is expected in the market.

Due to the perception of both commodities as precious metals, their correlation is quite significant. Therefore, looking at the gold-to-silver ratio, one can still observe a significant undervaluation of the "cheaper" metal relative to the "more expensive" one. The gold-to-silver ratio is currently at 88, while the 10-year average indicates a level of 80 points. Furthermore, the long-term average stands at 53 points. Assuming stability or increases in gold prices, silver prices still have significant upside potential. This is also evidenced by the fact that silver is still relatively far from its historical highs. Silver's historical peaks were reached in January 1980 at nearly $50 per ounce when concerns about the availability of this metal arose. With further development of new technologies and growing investment demand, a repeat of such a scenario cannot be ruled out.

The price ratio is clearly falling. If the price of gold were to stabilize, but the price ratio continued to drop to its 10-year average, it would imply that a short-term target for silver could be $40-42 per ounce. Source: Bloomberg Finance LP, XTB.

Silver's price has adjusted to gold's volatility in recent years. While further increases in silver, with gold consolidating, are possible, the best-case scenario for silver is continued moderate increases in gold prices. Excessive increases in gold prices are often associated with excessive market risk, which in turn is not very good for silver given its demand structure. Source: xStation5