History tells us that as a general rule the silver price performs better than gold when the latter is in a rising trend and conversely, performs worse on the downside. But in the latest gold price runup, silver has very definitely been underperforming and the Gold:Silver Ratio (GSR), much loved by silver investors as a guide, is languishing near record high levels. At the time of writing it is sitting at over 83 (i.e. one ounce of gold is worth the same as 83 ounces of silver), and historically it has tended to fluctuate between just below 100 and 15 or 16, although the latter levels - always seen by silver bulls as the 'correct' historical level - have not really been in evidence since silver was effectively demonetized many years ago apart from a very brief few days when the silver price peaked at over $100 back in 1979/80 when the Hunt Brothers almost succeeded in cornering the market and sent prices sky high.
The chart below from Macrotrends.net gives a great picture of the volatility in the GSR over the years. For a fully interactive version of the chart, click here. Interestingly, with the vertical shaded areas representing periods of recession, there does seem to be an interesting correlation between recessions and peaks in the GSR, thus the recent high levels could do indicate a period of recession, which many reckon already to be with us. One suspects that this recession correlation has much to do with the big industrial demand for silver which tends to suffer when the economy is weak
In a letter to former subscribers of his Deliberations on World Markets newsletter which he ceased publishing a couple of years ago, highly rated technical analyst, Ian McAvity does comment that silver is an industrial metal, and there are many reasons why it should trade independently from the gold price. But a comparison of the gold and silver prices over the years does indeed also show that with much greater volatility and periodic disparities; silver does indeed trade as "poor man's gold" with a remarkably close overall correlation between gold and silver price movements, but with much more volatility.
There is also, though, an extremely close correlation between movements in the silver price and that of gold, although the former tends to be much more volatile in its movements.
McAvity notes that throughout the history of man and money, there have been all sorts of "official" ratios between gold & silver. From 1965 to 1985, it appeared that silver was "too high" relative to gold at 15:1 but relatively "cheap" at 45:1.
He goes on to say that the aborted Hunt Brothers attempt to corner silver in 1980 may have played a role in setting a new apparent range from 1985, where silver was "high" relative to gold at 45:1 and "cheap" when 1 ounce of gold might be exchanged for 80 or more ounces of silver. That ratio range was dynamically resolved in 2011 by the surge to $50 that peaked with the ratio near 30:1.
"As a chartist", he comments, "the surge came from a chart breakout at the 60:1 level - that prompted me to advocate a possible new range may evolve, perhaps as 30:1 to 65:1. That's been blown out in 2015/16 as we're now back around 80:1…"
McAvity thus suggests that the silver investor should keep the above numbers in mind. He thus recommends that if you can get an ounce of gold for 40 or less ounces of silver you should take the gold. On the other hand if an ounce of gold can be exchanged for 80 or more ounces of silver, take the silver. Fluctuations in the GSR over the past 30 years do suggest that this would have been a very profitable policy. But he warns "But don't ever forget that silver is a smaller market with much greater price volatility. A big part of that decision should factor in just how much sleep you are willing to sacrifice… as silver tends to be a real "tummy tester" when silver interest is running high. That's how I view silver as a core asset. In bullish markets, it often becomes "Gold on Steroids…"
The writer does not see the GSR returning to the 16:1 ratio so beloved of the silver bulls, but would not rule out a ratio of 30 to 40 if gold should make a significant move upwards. But silver's volatility has given it the description among traders of 'the devils metal' - so be warned. it's been a dangerous metal to go either long or short in long term.
However, in investment terms it is often a good policy to buy when prices appear to be hitting historical lows if one sees the downside as more limited as a result. [See my December articles on GDXJ (GDXJ - Limited Downside And Great Upside Potential in a rising gold and silver price scenario] and (NYSE:HL) (Hecla Mining - A Small Cap Precious Metals Stock For the Medium to Long Term) where investments in both would have seen very strong returns of more than 30% over the subsequent two months. The GSR does suggest much the same - that the ratio should be near its lows and that downside is thus relatively limited. But this may depend on gold at least holding its current price levels and indeed going higher.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.