Keith Weiner

Gold-Silver Ratio Hits 10-Year High - Precious Metals Supply And Demand

Fundamental Developments

The price of gold dropped five bucks, and that of silver 40 cents last week. But let's take a look at the supply and demand fundamentals of both metals. Also, we continue to follow the development in the gold-silver ratio.

One can buy a lot of silver for one's gold these days. Silver has become extraordinarily cheap, but keep in mind that it was even cheaper versus gold in the early 1990s (see the section on silver further below for the details). Nevertheless, it seems clear that the risk-reward probabilities are increasingly favoring silver.

First, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold-to-silver ratio (see here for an explanation of bid and offer prices for the ratio). It rose to a 10-year high this week.

Gold-silver ratio - a 10-year high! The only time when this ratio was substantially lower was in the early 1990s.

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold.

The October contract is under selling pressure, as longs must close their positions in the next few weeks before First Notice Day. The December contract shows rising scarcity, but not this much and is not close to backwardation.

This, by the way, is one proof that there is no massive naked short-selling of futures. If there were, bullion banks would be buying the expiring contract with urgency. They would be pushing its price up.

Instead, we see its price going down. Bullion banks are arbitrageurs, happy to make a small spread without betting on price direction. It is the naked longs who must sell the contract with urgency. Thus, the expiring contract always has a falling basis, which means a falling price relative to spot (basis = future - spot).

This week, the Monetary Metals Gold Fundamental Price fell $5, from $1,376 to $1,371.

Now let's look at silver.

Silver basis, co-basis and the USD priced in grams of silver

There was not a lot of change in the scarcity of silver. The Monetary Metals Silver Fundamental Price fell $0.22, from $16.08 to $15.86.

Last week, we said:

This is the best time to trade gold for silver in the last three months, alright. But if basis ratio gets over 1.05 then it will be the best time in the last three years (this ratio hasn't spent more than two weeks or so above 1.05 since 2009).

This time, the gold-silver ratio is higher, currently 82.7 as of Friday's close.

Correction: the above should have said 1.005.

This week, the ratio of gold to silver closed at 84.65. And the ratio of the gold basis to the silver basis hit 1.0054 on Wednesday, and closing the week over 1.005.

Is now a good time to trade silver for gold? Well, you would have to go back to October 2008 to the last time the ratio was higher than this (it only got above this level on four days, the most notable being October, when it spiked to 87.88 intraday, only to close below 84). Before that was in February 1993. The ratio got above 85 from October 1990 through February 1993, peaking at 100 in January 1991.

We don't have basis data going back prior to 1996. We can say that the ratio of the gold basis to the silver basis has hit over 1.019 in October 2008. There were a few other instances of spikes in this ratio.

The balance of upside to downside risk and reward would seem to favor silver at this point.

Charts by Monetary Metals

Chart and image captions by PT