Silver has had a solid and discreet start to 2025, with a price increase of 12.6 percent. 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 purchase 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 averaged between 40-1 and 60-1. The fact that the current ratio is much wider than that historical range 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 it becomes significantly unbalanced. In recent decades, this recovery has tended to occur very quickly. For example, in 2020, the gold-silver ratio reached a record high of 123-1 when the pandemic took hold and then plummeted to around 60-1 when central banks around the world cranked up the money-printing machine to cope with governments shutting down economies.
The 2008 financial crisis and 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 Federal Reserve increases money creation and to widen again when the central bank attempts to tighten monetary policy.
The ratio narrowed when the Fed began discussing monetary easing last summer, but now it appears that the central bank is trying to slow down rate cuts due to persistent price inflation. Even so, the slowdown in balance sheet reduction that the Fed initiated last summer and the three rate cuts at the end of 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 bad investments in the economy due to decades of easy money, it is only a matter of time before the Federal Reserve is forced to reapply monetary easing measures. This could be the catalyst to drive 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 pattern develop within the handle of the broader secular trend.
Mike Maharrey, Money Metals