A bullish case for silver. Gold/silver ratio has halved in the past thirteen months, as silver proved to be a better store of value during the pandemic.
Gold’s main purpose in the traditional portfolio is to protect it against inflation. It acts as a hedge against rising prices, with many investment managers preferring to dedicate a few percentages to the yellow metal “just in case.”
In the last two decades, gold has outperformed both the stock and bond markets and the US dollar. It delivered an average annual return of 9.22%, not bad by all standards.
Inflation in the developed world comes mainly as a result of central banks’ reaction to the economic crisis. Unfortunately, in less than fifteen years, the developed world (and not only) had to cope with two major crises – one triggered by the housing market in the United States and the other by the COVID-19 pandemic.
A quick look at the average annual returns in the past two decades, as presented below, reveals that gold had outperformed in the post Great Financial Crisis world. The so-called precious metals bull market that followed the 2008-2009 crisis led to a massive gold rally.
Gold rallied as well in 2020, in response to the central banks’ and governments’ measures to tackle the crisis generated by the pandemic. But it was the “poor man’s gold”, or silver, that outperformed gold by a mile during the pandemic, proving to be a better store of value in the last year.
Gold/Silver Ratio Halved in the Last Thirteen Months
The gold-silver ratio is a reflection of how many ounces of silver are needed to buy one ounce of gold at the current market prices. More precisely, the ratio is obtained by dividing the current market price of gold by the current market price of silver.
A declining ratio reveals that silver outperforms gold, either by rising more than the price of gold or by consolidating while the price of gold declines. The opposite is true when the ratio advances.
The price of gold reached an all-time high in the summer of 2020. The market participants anticipated higher inflation and uncertainty ahead, so they took refuge in the price of gold.
But what followed took the market by surprise. It is silver, and not gold, that outperformed during the worse months of the pandemic. As the gold/silver ratio shows, it has halved in the last thirteen months, serving as a better store of value.