So, Gold and Silver are surging, what does this mean?
Historically, the relationship between Gold and Silver has assisted in predicting economic outlook and has been utilized as an indicator of market sentiment.
Should you be adding Gold or Silver to your portfolio?
With the current pandemic, there is now evidence of a new-normal, which poses new opportunities and emergence of re-evaluation of portfolio theory, with alternative assets, active management style and asset class weighting now crucial in bridging opportunities to actual out-performance.
The current gold/silver ratio stands at 74.15 and the 5 year low has been 65.58, and 5 year high has been 123.50.
What is the Gold/Silver Ratio?
The gold/silver ratio is simply the amount of silver it takes to purchase one ounce of gold. If the ratio is 25 to 1, that means, at the current price, you could use 25 ounces of silver to buy one ounce of gold. 25 to 1 would be considered a narrow ratio. A narrow ratio indicates that silver’s relative value is up and a wide ratio indicates that gold’s relative value is up. This ratio is an indicator that can be used to determine the right and wrong times to buy or sell gold and silver.
What are the Benefits of the Gold/Silver Ratio?
The benefits of the gold/silver ratio arise when there are fluctuations. Today, gold and silver trade mostly in sync with each other without a lot of shifts or variations. But when the ratio widens or narrow to levels that are considered extreme, trading opportunities are created. If the gold/silver ratio widens to 100 then a consumer who owns one ounce of gold could sell it and buy 100 ounces of silver. When the ratio widens silver becomes more favorable because, relative to the ratio, silver is somewhat inexpensive. Trading based on the gold to silver ratio is considered by many to be a good strategy to follow when trying to accumulate either gold or silver.
How is Gold/Silver ratio used as an economic predictor?
Economists tend to use the Gold/Silver ratio to understand market sentiment, with a wide Gold/Silver generally meaning that investors are preferring Gold compared to silver and this references investor sentiment and gives an outlook to the greater economic indicators. So, no surprise the peak Gold/Silver ratio appeared on March 28th, 2020 at a record high of 123.50 which had never been seen before. As a precursor, there were major sell downs of equities globally which saw massive falls in the stock markets globally.
With economies around the world utilizing quantitative easing measures, we are starting to see steeper declines of nominal currency values from countries like Turkey, Russia, Mexico, Columbia, Uruguay, Brazil, South Africa, Sudan, Zambia, Kazakhstan, Indonesia, Chile, Norway, Israel, Belarus and Ukraine.
Closer to home, Australia had a steep decline to lows of $0.58 and is currently trading above $0.71 US. The Reserve Bank’s decision to buy back long-term Australian government bonds, is leading to a stronger Australian dollar, with the impacts of this strategy to be felt in years to come. As governments around the world are responding to the ravaging impacts of the virus, it is vital to be active in managing portfolios. Portfolio theories are all being re-written in front of our eyes. Australia as an economy has an extraordinarily strong Financial system, usually the envy of the world, due to continued growth of our economy over the years. As geopolitical issues threaten the very nature of this economy going forward, some of the opportunities to look inwardly has been raised. Historically, Australia has exported huge volumes of commodities in exchange for paper money, and in return bought goods and services from other economic partners, causing heavy reliance and very dependent relationships. In return for Australia’s wealth of resources, the economy flourished with record levels of foreign investment and growth in the economy for sustained periods of time. As the Reserve Bank published on August 8th, 2020, their base case modelling of the pandemic impacts. The negative outlook, seems bleaker, it is a scary thought for the Millennial and Gen Z’s. These individuals may experience economic uncertainties potentially for the first time. How would this generation be able to survive long-term, as economic policy needs to be amended to address this problem!
Investor sentiment is changing drastically and there is now time for innovation to look at alternative assets such as commodities (precious metals) and cryptocurrency which has shown a linear relationship to each other, as investors in countries that are getting ravaged by the pandemic, are utilizing these alternative assets to maintain the store of value.
Bitcoin as the peg for cryptocurrency and digital assets, had an inverse correlation to Gold/Silver ratio. During March 2020, Bitcoin had its lowest trading price for the year and now as the Gold/Silver ratio is falling, Bitcoin and other cryptocurrencies are growing at exponential rates, validating the inverse correlation. This is validation for where the current investor sentiment lies with all the uncertainty. Huge demands in the countries listed above are fueling Bitcoin demand as the fiat currencies depreciate significantly in value.
During uncertain times, there are definite opportunities and problems that start to emerge. As evolution of humans has shown, innovation has led to major improvements to society, but the fundamental behaviors or sentiment remain the same, and during the uncertain times, precious metals bring safety to investors mind and the surge in demand is a direct response to the uncertain times. Emergence of new technology and products are required to manage the new-normal.
Food for thought — how many of you are holding precious metals or Bitcoin (the new gold standard) in your portfolios?