The gold/silver ratio is one of the most important and closely watched figures in the precious metals world.
Although gold has outperformed silver, some analysts suggest that the ratio is unlikely to decline in the short term as gold appears to continue its strong upward trend.
Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence, stated, "Adam Smith's 'The Wealth of Nations' mentioned gold and silver, but not crude oil, which has implications for the transformation of commodities and the tailwinds for benchmark precious metals."
"For centuries, gold has been dethroning its cousin in terms of currency, and with rising unemployment in the U.S. and declining yields on Chinese and U.S. government bonds, the gold/silver cross seems to be heading towards 100," according to McGlone.
He anticipates that increased volatility "could propel gold past silver," and once the yield curve inversion normalizes, gold is expected to rise strongly.
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He noted, "The last time the U.S. stock market experienced similar low rates alongside high rates was in 2006, when the gold/silver ratio bottomed out around 45."
"We saw similarities around 86 on August 30th.
The upward path of the cross rate could gain momentum from a reversal at a point – increased volatility, lower rates."
McGlone added, "The 52-week average of the CBOE Volatility Index (VIX) minus the three-month Treasury bill rate is around 10%, lower than the 2018 low, which pushed the gold/silver cross from a level roughly similar to this year's low to the 2020 high of 124."
He warned that the current low volatility environment "could be fleeting amid escalating global tensions and a propensity for U.S. economic recession."
McGlone stated, "Silver is part of the technology that replaces fossil fuels (crude oil), but central banks are buying gold, and industrial demand and the price of the white metal may have a closer link to stock market volatility."
He added that the current yield curve inversion is the longest-lasting inversion in history, suggesting that the gold/silver cross could rise to 100.
McGlone said, "If we take the most inverted U.S. yield curve in about forty years as a clue, the gold/silver cross could rise to 100.
Resistance around 76 on the cross could turn into support for good reason: the inversion of the yield curve."
"This is the conclusion we draw from the chart that showed the three-month Treasury bill rate was about 100 basis points higher than the 30-year Treasury bond yield on August 30th."
He added, "The sharp inversion of 156 basis points in July 2023 could mark the lower limit of the spread."
"When the yield curve normalizes from a similar steep inversion, gold tends to rise relative to silver, and our bias – against the backdrop of rising unemployment – may still be in its early stages."
McGlone attributed changes in market structure to fluctuations in market sentiment and central bank buying behavior.
He said, "The U.S. sentiment pendulum swung too far towards recession in 2023 and too optimistic in 2024, and now may just be retreating."
"Central banks are buying gold, not silver," he said, and the unemployment rate also suggests that gold will outperform silver.
He said, "Gold could rise more than silver because the unemployment rate has never bottomed out from the 3.4% low in 2023, nor has it exceeded 6% (since 1948)."
"Our charts show a close link between the precious metals cross and unemployment rates, especially when unemployment recovers like it is now," McGlone said.
"The silver-to-gold ratio of 73 ounces in May was the lowest since 2021, which could set the stage for the cross."
"Around 86 on August 30th, 73 seems to be the key support on the way to 100."
He concluded, "What prevents the gold/silver cross from rising with rising unemployment could be the foremost question in the second half of the year – our bias is small."
"Reversals in unemployment are rare, and with the Consumer Price Index falling below the rising unemployment rate for the first time since 1982, the tailwinds for gold/silver look strong."