(Kitco News) – The gold/silver ratio is among the most important and closely watched numbers in the world of precious metals, and despite gold’s outperformance compared to its gray counterpart, one analyst says the ratio is unlikely to decrease anytime soon as the yellow metal looks to extend its strong uptrend.
“Gold and silver are featured in Adam Smith's ‘The Wealth of Nations’ and crude oil isn't, with implications for commodity transmogrification and tailwinds for the benchmark precious metal,” said Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence. “Gold has been demonetizing its cousin for centuries, and the gold/silver cross appears on track toward 100 as US unemployment rises and government bond yields decline in China and the US.”
According to McGlone, a predicted increase in volatility “may buoy gold over silver,” and the yellow metal is expected to see a strong upswing once the inversion in the yield curve normalizes.
“The last time US stock market volatility reached a similar low vs. high rates was 2006, about when the gold/silver cross bottomed around 45,” he noted. “We see parallels at about 86 on Aug. 30. The cross rate's upward path may gain speed from a bit of reversion – upward in volatility and downward in rates.”
“At about 10%, the 52-week average of the Cboe Volatility Index (VIX) minus the three-month T-bill rate is below the 2018 nadir that launched the gold/silver cross from about the same level as this year's low to the 2020 apex at 124,” McGlone added.
He warned that the current low volatility environment “may be short-lived amid escalating global tensions and US recession leanings.”
“Silver is part of the technology replacing fossil fuels (crude oil), but central banks are buying gold, and industrial demand and prices of the white metal may be more closely linked to stock market fluctuations,” McGlone said.
He added that the current yield curve inversion, which is now the longest-running period of inversion in history, is a sign that the gold/silver cross could rise to 100.
“The gold/silver cross may be set to rise toward 100, if the most inverted US yield curve in about four decades is a clue. What was resistance in the cross around 76 could be transitioning into support, and for good reason: disinversion of the yield curve,” McGlone said. “That's our takeaway from the graphic showing the three-month T-bill rate about 100 bps above the Treasury 30-year bond yield on Aug. 30.”
“The wide inversion of 156 bps in July 2023 might have marked the spread floor,” he added. “Gold has had a tendency to advance vs. silver when the yield curve normalized from similar steep inversions, and our bias – on the back of rising unemployment – is it may be early days.”
McGlone attributed the changing market structure to the oscillation of market sentiment and central bank buying.
“The US sentiment pendulum that swung too far toward recession in 2023 and too optimistically in 2024 may simply be swinging back,” he said. “Central banks are buying gold, not silver.”
He said the unemployment rate also suggests that gold will outperform silver.
“Gold may get a boost over silver from the fact that the unemployment rate has never bottomed from a similar low as 3.4% in 2023 without surpassing 6% (since 1948),” he said. “Our graphic shows the close connection between the precious-metal cross and jobless rate, especially when unemployment recovered akin to the pattern now.”
“The backup to 73 ounces of silver to gold in May – the lowest since 2021 – might have set a floor under the cross,” McGlone suggested. “At about 86 on Aug. 30, 73 looks like key support on the way toward 100.”
“What stops the gold/silver cross from rising with unemployment could be a top question for 2H – and our bias is little,” he concluded. “It's rare for the jobless rate to reverse course, and with the consumer price index year over year falling below rising unemployment for the first time since 1982, gold/silver tailwinds look strong.”
