2600 years ago, the Anatolian Kingdom of Lydia minted the world’s first gold and silver coins.  In doing so, the Lydian King Alyattes and his successor Croesus introduced the world’s first exchange rate: the gold-silver cross.  Like any cross rate, the amount of silver that can be purchased with an ounce of gold is driven by both demand and supply-side factors, and the cross rate is anything other than stable.  Sadly, we don’t have the time series of the gold-silver ratio dating back to ancient times, but we do have data going back to the launch of gold futures on December 31, 1974.  Since the mid-1970s, one ounce of gold bought anywhere from 17 ounces to as many as 123 ounces of silver (Figure 1).

Figure 1: The amount of silver an ounce of gold can buy has been highly variable

In addition to the impact of monetary policy, which we have covered here, the gold-silver ratio appears to be governed by four other factors:

  1. Relative volatility and the silver beta
  2. Fabrication demand and technological change
  3. Gold’s use as a monetary asset
  4. Supply-side dynamics

Relative volatility and beta

To borrow an expression from the equity markets, silver is the high-beta version of gold.  First, silver and gold prices usually have a strong positive correlation.  Since 2004 the one-year rolling correlation of their daily price moves has hovered around +0.8 (Figure 2).  Second, silver is more volatile than gold.  As such, when gold prices move up, silver tends to move up more, thereby lowering the gold-silver price ratio.  By contrast, during bear markets, the gold-silver ratio tends to rise.

Figure 2: The correlation of gold and silver price changes has hugged +0.8 since 2004.

For example, when gold and silver prices peaked in September 2011, one ounce of gold bought fewer than 32 ounces of silver (Figure 3).  In the ensuing bear market, the ratio rose to as high as 124 ounces of silver per ounce of gold.  The ratio snapped back to 64 in 2020 as gold and silver rallied early in the pandemic.  In 2024, as both metals have rallied, silver has outperformed, rising 23% in the first five months of the year compared to 12% for the yellow metal.

Figure 3: Positive correlation plus much higher volatility give silver a high beta to gold

Fabrication Demand and the Impact of Technological Change

What is curious is that while gold and silver have rallied thus far in 2024, gold broke to new record highs of nearly $2,500 per ounce whereas silver prices remain 40% below their twin 1980 and 2011 peaks despite having outperformed gold since 2020 (Figure 4).  The reason may lie in technological advances.  

Figure 4: Gold has hit records in 2024 while silver is still 40% below its 1980 and 2011 record highs

Even before the Lydians minted the first gold and silver coins around 600 BCE, both metals had been used to make jewellery: silver since around 2500 BCE and gold since 4500 BCE.  Some things don’t change.  Even today, the primary use of both metals is to make jewellery.  Yet, thus far this century, silver has been buffeted by two sets of technological developments: the digital revolution and the energy transition.  Both have impacted the relative gold-silver ratio. 

In 1999, photography used 267.7 million troy ounces of silver which accounted for 36.6% of that year’s total silver supply.  By 2023 photography used only 23.2 million ounces of silver or about 2.3% of 2023’s total supply due to the rise of digital photography. Meanwhile, silver’s use in electronics and batteries grew from 90 million ounces to 227.4 million ounces or from 12.3% to 22.7% of silver’s total annual supply, partially offsetting the decline in traditional photography, which may partially explain why silver has struggled to hit new highs in recent years even as gold has set records. 

The good news for silver, however, is that it is finding new use in the energy transition.  Over the past few years silver has seen strong growth coming from solar panels, which accounted for 20% of 2023 silver demand, up from essentially nothing in 1999 (Figure 5). Solar panels may explain in part why silver has recovered relative to gold since 2020.

Figure 5: Battery and solar panel demand have grown as photography demand has shrunk

By contrast, gold fabrication demand has shown itself to be immune from recent technological developments and is still overwhelmingly dominated by jewellery demand, with electronics, dental and other uses absorbing just 17% of annual gold mining supply (Figure 6). The differences in silver and gold fabrication demand underscores that gold is considered the purer of the two precious metals. 

Figure 6: Gold fabrication demand has remained little changed

Gold and global monetary policy

Indeed, central banks around the world treat gold as money while they largely ignore silver (Figure 7).  They hold a combined 36,700 metric tons of gold, the equivalent of 1.2 billion troy ounces or 13 years of global mining output.  Moreover, central banks have been net buyers of gold every year since the global financial crisis.

Figure 7: Central banks have been net buyers of gold since the global financial crisis

Central bank buying of gold since 2009 contrasts sharply with their tendency to be net sellers from 1982 to 2007. Central banks’ accumulation of gold suggests that they want a hard asset to complement their foreign exchange reserves of dollars, euros, yen and other fiat currencies, a view that appears to have been reinforced by on-and-off quantitative easing since 2009 and increased use of financial sanctions. Central bank buying impacts gold prices directly, but only boosts silver prices indirectly via the gold market. 

The supply side of the equation

Central bank gold buying reduces the amount of gold available to the public.  Over the past decade, central bank buying has removed the equivalent of 8%-20% of new mining supply from the gold market each year (Figure 8) which may also explain why the gold-silver ratio rose significantly from 2011 to 2020 and why, even today, it remains at 2x its 2011 level.

Figure 8: Net of central bank buying, gold supply has stagnated since 2003

Total gold supply net of official purchases has stagnated since 2003.  Meanwhile, silver mining supply peaked in 2016 and gold mining supply peaked the next year (Figure 9).  The fact that new supply is arriving on the market more slowly than in the past may be bullish for both gold and silver.

Figure 9: Gold and silver respond negative to changes in each other’s mining supply.

Our econometric analysis shows that gold and silver prices are negatively correlated with changes to  one another’s mining supply.  A 1% decrease in gold mining supply, on balance, boosted gold prices by 1.9% and silver by 3.0% from 1974 to 2023.  A 1% decease in silver mining supply boosted the prices of the metals by 1.3%-1.6% (Figure 10).  Secondary supply appears to respond to price rather than drive it.  Higher prices incentivize more recycling, but recycled metal doesn’t appear to depress prices as it doesn’t bring any new metal onto the market.

Figure 10: Secondary supply responds to price rather than drives it

What connects the two markets is jewellery.  Because gold is 70x as costlier than silver, when prices rise, demand for gold jewellery falls while silver’s jewellery demand is relatively unresponsive to price because it costs much less. Gold and silver can be seen as a sort of binary star system where the two stars orbit a common center of gravity or barycenter. Gold is the larger, more stable and more influential of the two, but it is by no means immune from silver’s pull. 

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