Gold is going crazy, what about silver?

Author: Wan Lianshan, Source: Gelong

Recently, there is a news that is difficult to comment on: the gold craze has gone from "exclusive to middle-aged women" to "young people's battlefield".

When young people go crazy, middle-aged women have to admit defeat.

Some people born after 1995 have taken out loans of 600,000 yuan, some have mortgaged their houses to cash out, and some have used credit cards and online loans to raise money... "The price of gold has risen by 30% this year and 28% last year, and the interest rate is only 4%. Isn't this a steady profit?"

In this regard, most middle-aged and elderly people, and even younger groups, are opposed.

The reasons are varied, but in the final analysis, it is actually one sentence: Chinese people hate gambling.

But to be honest, if you really started to borrow money to buy gold last year, you did make a lot of money.

Objectively speaking, people who can firmly believe in gold at least a year ago and put it into practice are actually worthy of praise.

In terms of results, this is much better than going to work.

What right do bystanders who have missed opportunities again and again and are hesitant to get on the train have to criticize others in a fatherly manner?

…

Of course, I am not encouraging young people to take out loans to speculate in gold.

Although we have been bullish on gold since last year, the price of gold has risen to such a high level now. Do you still think it will rise?

In fact, I am still optimistic.

Because the current macroeconomic situation does not seem to be better or even worse than in the past few years, and the gold buying tide of central banks in various countries is still continuing... The driving force supporting the gold bull market has not only not weakened, but has become stronger.

But you ask me if I dare to increase my position?

To be honest, I don’t really want to increase it.

It’s not that I have made enough money, but I just saw that the gold-silver ratio has been above 100 for half a month, and suddenly I think...silver may be more fragrant?

This is a relative question.

Since 2022, silver has indeed been in a bull market.

But is it really bullish relative to gold?

Precious time difference

Silver prices are the followers of gold prices.

In the era of credit currency, the normal trading logic of silver has never been in itself.

In general, the price of silver follows the rise and fall of the price of gold, which is an incompletely correct "common sense".

Because the rise in the price of gold will not immediately drive the price of silver to rise.

The reason for this is that silver is positioned as a backup for gold in terms of investment.

Only when the price of gold grows too fast, as a cheap substitute for gold, will silver begin to be purchased in large quantities and enter a rising cycle.

The time difference between the rise in gold prices and the rise in silver prices is often a good arbitrage opportunity.

For example, the time point when the gold price completely broke through $2,000 and started this round of sharp rise was in early February 2024, and the increase has exceeded 85% so far; while the silver price was in early April 2024, and the highest increase has exceeded 55% so far.

The time difference is close to 2 months.

So once you see a sharp rise in gold, investors who look at the long term will ambush silver in advance in addition to buying gold.

Why is there such a time difference?

To explain this problem logically, we cannot avoid the concept that many self-proclaimed "professionals" sneer at: gold-silver ratio.

That is, the price ratio of equal weight of gold and silver.

Since 1996, the long-term average of the gold-silver ratio is about 60.

Whenever the gold-silver ratio reaches 40/70, it means that silver is overvalued/undervalued relative to gold, and silver should be shorted/longed.

Simply put, if the gold-silver ratio is too high, either silver will rise or gold will fall before it can return to the average range.

This rule has been verified many times in the past three decades.

Or the most recent one.

From September 2018 to August 2020, the price of gold rose by more than 50%; but silver did not start to rise until May 2019, and the highest increase by August 2020 was only 26%.

This caused the gold-silver ratio to soar to 129 at the beginning of 2020.

So in the past two years, many institutions and investors began to question the gold-silver ratio, and the artificial rule has failed.

Is it actually invalid?

In retrospect, even if the gold-silver ratio soared to such an extreme position, as the price of silver and gold kept pace in 2020, the gold-silver ratio returned from 129 to the range of around 70 in just half a year.

Obviously, no matter how extreme, the law still exists.

But the emergence of extreme situations has indeed caused the average position of the gold-silver ratio after 2020 to be higher than before 2020.

Why does this extreme situation occur?

Looking back, the factor that is highly correlated with the rise and fall of the gold-silver ratio is the fear and greed index VIX index.

The last time this happened was during the last round of gold bull market.

In 2008, the VIX index rose from 20 to 130, the highest value in history, and the gold-silver ratio rose to over 80.

In 2010, the VIX index fell to around 20, and the gold-silver ratio also reached a minimum of 32.

Whether it rises or falls, the VIX index is always one step ahead of the gold-silver ratio.

A similar situation was almost replicated in 2020.

The VIX index broke through 130 again, and the gold-silver ratio followed closely to 129, and then fell back closely following the former.

The two waves of market trends seem to be the same overall, but the subtle differences have created new problems.

In the 2008 wave, the gold-silver ratio fell from 80 to 32, a 60% increase.

In the 2020 wave, the amplitude of the VIX index was almost the same as that in 2008, but the decline of the gold-silver ratio was smaller than the previous time.

In 2020, the highest point of gold price was $2,089, while the silver price could not break through $30.

The lowest point of the decline of the gold-silver ratio did not fall below 60.

As a result, the average position of the gold-silver ratio after 2020 is higher than that before 2020.

In other words, the value of silver was not fully released in the 2018-2020 wave?

Why?

Because the gold price at the source fell into a turbulent state.

Fickle gold-silver ratio

It is generally believed that this round is the starting point of the gold bull market. In 2018, it corresponds to the ten-year bull market from 2001 to 2011.

The similarity between the two is that after the gold-silver ratio fell back to the normal range as the VIX index surged, the gold price fell into a period of oscillation.

The difference is that the oscillation period of the former is less than 2 years, while the latter lasts from August 2020 to October 2023, more than 3 years.

The oscillation period of silver prices follows the gold price, as shown in the figure below.

What is the difference?

The end time of the silver bull market is a little earlier than that of the gold bull market; and the start time, as mentioned above, has a significant time difference.

It is precisely because of this time difference that the oscillation period of silver prices is longer than that of gold prices.

This round of silver price volatility will not end until early April 2024.

COMEX gold trend, source: Choice

COMEX gold trend, source: Choice

The problem is that after completely saying goodbye to the $2,000 barrier, gold has broken through $3,000 all the way, which is incredibly strong.

And the highest point of silver is still $35.5 at the end of last month.

Why is it so?

In fact, if you observe more, the general framework is still so familiar.

The impact of the VIX index on the gold-silver ratio mentioned above is not only applicable to large cycles, but also seems to be true in smaller time scales.

At the beginning of this month, Trump's "reciprocal tariff" policy caused global panic to spread, and the VIX index soared by more than 118% from April 3 to 7, once breaking through 60.

During these three trading days, the price of gold fell by 6%, while the highest drop in the price of silver was close to 20%, causing the gold-silver ratio to rise again, reaching 110 at one point.

However, after April 7, the VIX index fell sharply, but the gold-silver ratio did not change significantly.

At this moment, the gold-silver ratio is still around 103, which is still a relatively exaggerated position.

Even if the average position of the gold-silver ratio may be higher than before, this is unreasonable.

Compared with around 2020, the average range has become higher, and at most it has risen from around 60 to around 70, and it is impossible to soar directly to 100.

So what should the normal gold-silver ratio be now?

VIX index trend, source: Choice

Why is there an unprecedented bull market in gold?

As we have discussed many times before, to a large extent, the excessive issuance of credit currency has destroyed its own credit, making the attribute of "currency" return to gold in a small part.

Silver,does not have this attribute,it is still an industrial product and a speculative product.

Otherwise, in the same bull market, why do countries only hoard gold and not silver?

According to this logic, the gold-silver ratio will completely change the stable situation from 1980 to 2006 and return to the rising range before the abandonment of the gold standard.

Looking at the trend in the past 20 years, this statement has also been verified.

The question is, is it possible for this increase to be so drastic?

Looking back, the lowest point of the gold-silver ratio in 2010 was 32, and the lowest point of the gold-silver ratio in 2020 was 60.

Although the difference is nearly doubled, the average range from 2010 to 2020 is still around 60, and the average range after 2020 is around 70.

Although the range is rising, the change will not be so fast.

Normally, the gold-silver ratio in 2025 and beyond, even if it is higher than that in 2020-2024, cannot directly reach 100.

In other words, compared with gold, silver still has room for appreciation.

To be conservative, the gold-silver ratio will stabilize at around 80 in the future.

The current gold price is over $3,400, and the corresponding silver price should be over $40, while the current silver price is only $33.

The theoretical price differs from the actual price by more than 20%.

Even if it is more aggressive, the gold-silver ratio will soar to 90, and the corresponding silver price should be over $37, which is also higher than the actual price.

This is a short-term space.

In the medium term, Goldman Sachs has significantly raised the gold price to $3,700 by the end of 2025, and the target price is $4,000 in mid-2026.

In the narrative of the gold-silver ratio, the room for gold prices to rise is also the room for silver to rise to a certain extent.

At least in theory, in the medium and short term, the silver market will not stall, and the increase may even exceed that of gold.

But in the long run, we have to be wary of a risk.

Epilogue

If the rise of gold is a reflection of the decline in monetary credit, it is a real regaining of real value.

Then, why can silver follow suit?

Just because of the gold-silver ratio? This is too far-fetched.

Why is the rise of silver far less than that of gold?

Why is the actual price of silver far less than the theoretical price?

It is because silver has not obtained the real value that gold has suddenly obtained.

The reason why it can still follow the trend of gold and maintain a seemingly similar trend with the past trend of gold and silver...to a large extent, it relies on its speculative attributes.

...

After silver completely lost its currency status, a large number of silver mines around the world were closed, and it suddenly became hated by people and ghosts.

This led to a very limited amount of silver circulating in the market.

From 1973 to 1979, the Hunt brothers in the United States took out loans frantically to buy at the bottom, and ate a total of 200 million ounces of silver, almost mastering the voice of the entire market.

Under deliberate speculation, the price of silver was pushed up to the historical highest level of $50/ounce in early 1980, causing the silver smuggling case to sweep the world and countless people to become rich overnight.

But it collapsed in an instant, and also caused countless people to lose their fortunes.

This incident made the world more clearly realize that silver, which has lost its currency attributes, has only pure speculative attributes except for some industrial value.

Although this speculative nature has not yet erupted on a large scale, it has not disappeared.

When will history repeat itself? This possibility is not ruled out this year.

Silver has been silent at a low level for more than ten years. Even the big bull in 2020 hit four times in a row before it barely broke through the $30 bull-bear dividing line.

This time in 2024, the price of silver followed the trend of gold and broke through $30 so easily, which means that the stop loss of the short position below was knocked out, increasing the power of the buyer.

After so many years of accumulation, can the bulls really resist taking the initiative to increase their efforts and just be the "tail bug" of gold?

If that moment really comes, please remember the lessons of history.