Mike Maharrey, an analyst at Money Metals, noted that two months ago, the gold-silver ratio broke through an important support level, suggesting that silver may be in the early stages of narrowing its price gap with gold. Here are his views:

The gold-silver ratio means how many ounces of silver are needed to buy one ounce of gold. The current gold-silver ratio hovers around 76 to 1. This means that it takes 76 ounces of silver to buy one ounce of gold. This ratio is still historically high, which means that silver is undervalued relative to gold, but there are signs that this trend may be in the early stages of reversing.

In modern times, the gold-silver ratio has averaged between 40-60 to 1. When this ratio is well above its historical average highs, it tends to revert strongly to the mean.

For example, in 2020, the gold-silver ratio hit a record high of 123 to 1 due to the global panic over the COVID-19 pandemic, and then plummeted to about 60 to 1 as major central banks around the world cut interest rates in response to relatively closed economic conditions.

Another example of this rebound is during the monetary easing following the 2008 financial crisis, when the gold-silver ratio rose to over 80 to 1, only to fall to 30 to 1 in 2011.

Three months ago, the gold-silver ratio climbed as high as 87 to 1. Two months ago, the ratio fell to about 73 to 1, breaking the 13-year support level. The ratio rebounded to 80 to 1, but failed to reclaim the 13-year support level before falling to its current level in the past five days.

Gold-Silver Ratio

Given the increased likelihood of a Federal Reserve rate cut in the fall, the outlook for gold remains bullish and silver may be gearing up for a major bull run.

Silver typically outperforms gold during a gold bull market. For example, during the COVID-19 pandemic, gold rose by about 40%, while silver soared by a staggering 141%!

In the context of fundamentals, gold and silver are more important than the recent signal of breaking support. Silver demand is at record levels, while supply is stagnant.

Silver demand is expected to reach 1.2 billion ounces this year. This would be the second-highest annual silver demand in history. Given the supply outlook, this level of demand would create a structural market deficit of 176 million ounces. This would be the fourth consecutive year that silver has been in short supply, further reducing global silver reserves.

The structural deficit in 2023 reaches 184.3 million ounces.

Silver demand is likely to increase in the coming years due to the growth of the solar market. Not only is the demand for silver substrates growing, but the amount of silver used in each panel is also increasing.

According to a research paper by scientists at the University of New South Wales, solar manufacturers may need more than 20% of the current annual silver supply by 2027. By 2050, solar panel production will consume approximately 85% to 98% of the current global silver reserves.

Given the supply and demand fundamentals and the technical break in the gold-silver ratio, this could be an excellent time to buy silver in the early stages of a bull market.

Article forwarded from: Jinshi Data