Silver has had a solid, low-key start to 2025, with a 12.6 percent price increase. However, it remains significantly undervalued compared to gold from a historical perspective, with a gold-silver ratio still above 90-1.
The gold-silver ratio indicates how many ounces of silver are needed to buy one ounce of gold, given the current spot price of both metals.
While industrial demand has a much greater impact on the price of silver than gold, silver remains fundamentally a monetary metal and its price tends to follow that of gold over time. The gold-silver ratio reflects this relationship.
In the modern era, the gold-silver ratio has ranged on average between 40-1 and 60-1. The fact that the current ratio is much wider than that historical difference indicates that silver is undervalued and a bargain compared to gold.
As with most averages, the gold-silver ratio tends to revert to the mean when significantly out of balance. In recent decades, this recovery has tended to occur very quickly. For example, in 2020, the gold-silver ratio hit a record high of 123-1 when the pandemic took hold and then plummeted to around 60-1 as central banks around the world cranked up the money creation machine to deal with governments shutting down economies.
The 2008 financial crisis and the Great Recession are another example. The spread rose to over 80-1 in the early days of the crisis and then fell to 30-1 when the Federal Reserve cranked up the money printing machine.
These two examples indicate that there appears to be some correlation between the gold-silver ratio and central bank money creation. The spread tends to narrow when the Fed increases money creation and to widen again when the central bank attempts to tighten monetary policy.
The ratio was reduced when the Fed began discussing monetary easing last summer, but now it appears that the central bank is trying to slow rate cuts due to persistent price inflation. Even so, the slowdown in balance sheet reduction that the Fed began last summer and the three rate cuts late last year have already created a more inflationary environment with an increase in the money supply. This is, by definition , inflation. This has supported gold and silver prices, along with market volatility caused by the flow of metal from London to New York due to tariff threats and other factors.
Given the level of debt and malinvestment in the economy due to decades of easy money, it is only a matter of time before the Fed is forced to return to monetary easing. This could be the catalyst to push silver higher and close the gold-silver ratio.
Supply and demand dynamics also indicate that silver is undervalued. There is also a technical indicator that is bullish for silver.
Last fall, I reported on a "secular cup and handle" pattern in silver. Since November, we have seen a short-term cup and handle patent develop within the broader secular trend handle.
Mike Maharrey, Money Metals