What Makes Silver Prices Outperform, or Trail, Gold
Over the past half century, gold and silver prices have shown a strong positive correlation. Their correlation has been especially high during the past 18 years (Figure 1).
Figure 1: Gold and silver typically show a strong, positive correlation
While gold and silver have a strong positive correlation, the ratio of their prices has ranged widely, from one ounce of gold buying as few as 30 ounces of silver in 2011 to as many as 120 ounces of silver in 2020 (Figure 2). In the early stages of the pandemic, silver snapped back, jumping from 120 ounces of silver per ounce of gold to as few as 65. However, in recent months the ratio has begun to slide again: currently one ounce of gold buys over 90 ounces of silver.
Figure 2: The Gold-Silver ratio has ranged widely over the past several decades
What is behind the sharp movements in the price of silver relative to gold? There are three factors:
- Differences in the end uses of silver and gold
- The decline in conventional photography, and the energy transition
- Fluctuations in Chinese demand.
Mirror, mirror on the wall, which is the most precious metal of all?
Although gold and silver are both classified as precious metals, gold has the edge in the sense that it has relative few industrials uses. Last year, 12% of gold was used for some sort of industrial application (including dentistry) compared to 60% that went into making jewellery. The remaining 28% was stored for investment purposes (Figure 3).
Figure 3: Gold is used primarily for jewellery and for investments
By contrast, silver is used primarily for industrial purposes. In 2021, approximately 29% of silver was used to create jewellery and silverware, 23% went into electronics, 12% into solar panels and 24% for other industrial uses (Figure 4). As such, investors tend to treat silver as a hybrid precious- industrial metal, one that follows gold prices on a day-to-day basis but also with long periods of over and underperformance against the yellow metal. Historically, silver often outperformed gold during periods of strong economic expansion during which industrial economies boomed, and tended to underperform gold during periods of economic stress.
Figure 4: Silver is primarily used for industrial applications, batteries & solar panels
