In recent months, gold prices have risen to new record highs, topping $3,500 for the first time before easing to $3,350. Silver prices have also been rising in tandem, peaking at above $37 per ounce but remaining well below its twin highs from 1980 and 2011 (Figure 1). Over time, the relative value of gold and silver as measured by their price ratio has varied amid supply growth, central bank buying, advances in technology (photography and solar panels) as well as the pace of Chinese growth.
Figure 1: Gold’s rally outstripped silver but silver has begun to catch up recently
On a day-to-day basis, gold and silver prices are often highly correlated with a one-year rolling correlation coefficient ranging from 0.68 to 0.95. Currently, the two metals are experiencing their weakest price correlation in over two decades (Figure 2). Moreover, even during periods of high correlation, the gold-silver ratio can move a great deal.
Figure 2: The gold-silver correlation, though still strong, has recently weakened
During gold’s period of outperformance over silver, the gold-silver price ratio (the number of troy ounces of silver it takes to buy a troy ounce of gold) crossed over 100 for the first time since 2020 before falling back towards 90 in June. During the period from 1997 to 2011, one ounce of gold typically bought anywhere from 25 to 83 ounces of silver, so its current trading level of around 90x as expensive as silver is still far from what was once historical norms (Figure 3).
Figure 3: Gold became quite expensive relative to silver but the ratio is starting to fall back
At first glance, gold’s outperformance relative to silver may seem mysterious from a supply perspective. In recent years, gold mining supply has been around 97 million troy ounces whereas silver mining output has been around 800 million (Figures 4 and 5). Mining production of both gold and silver peaked in the mid-2010s, fell in the late 2010s and then stabilized. Secondary supply (recycled metal) has been rising but secondary supply tends to respond to price changes rather than drive them.
Figure 4: Gold mining supply has been soft while secondary recovery has been growing
Figure 5: Silver mining supply has been growing slightly in recent years
But gold has an advantage that silver lacks: central banks. Central banks have been net buyers of gold since 2008 after having been net sellers previously (Figure 6). Central bank buying removes gold from the market permanently or at least until the central banks choose to reduce their holding, which they haven’t done since 2007. Net of official central bank transactions, gold supply is lower today than it was in 2005 (Figure 7) while silver supply is up by over 35%.
Figure 6: Central banks have been buying gold since 2008 after decades of selling
Figure 7: Central-bank buying of gold means less available supply for the rest of the market
On the demand side, gold and silver are connected through the jewellery market. Unlike silver, however, gold has very few industrial uses (Figure 8). By contrast, silver has a myriad of practical uses. A quarter century ago, the biggest of these applications was photography, but that dwindled from 25% of annual silver mining output to less than 4%, explaining, in part, silver’s underperformance relative to gold. On the positive side, silver is finding increased applications in batteries and solar panels. That said, most silver is used for other industrial purposes, and this leaves silver at the mercy of the strength of global industrial demand (Figure 9).
Figure 8: Gold has little use other than as jewellery and as investment
Figure 9: Unlike gold, silver has many industrial uses
Figure 10: The gold-silver ratio closely tracks the pace of Chinese growth
Bottom Line
- Central-bank buying of gold has contributed to its outperformance relative to silver.
- The decline of photography has hurt silver prices.
- Growth in solar panel manufacturing may provide support for silver.
- The gold-silver ratio has been tightly connected to the pace of Chinese growth.
Trading Precious Metals
Trade inter-market metal spreads with our variety of products from standard-sized benchmarks to smaller-sized contracts.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
