Gold's historic rise relative to silver

Key points:

• Gold is trading for 100x the price of silver for only the third time in 50 years
• The historic ratio is due to a massive run over the past 6 months, with a 30% jump in the relative ratio
• After other six-month surges, gold tended to continue outperforming silver for several months

A six-month surge to a historic ratio

We all know gold has been on a tear. Heck, half the world is probably aware of it by now. When gold bugs go on a run, it's like few other things in markets. The excitement has rubbed off on a few other precious metals over the past month, but even so, they haven't kept pace with the yellow metal.

With its latest push, gold traded for 100x the price of silver for only the third time in 50 years. The first time, in 1991, immediately preceded a peak in the ratio. In 2020, gold continued to soar for a few sessions relative to silver during the height of the pandemic panic, but soon erased years' worth of gains. We're currently amid the third instance, as the ratio has rocketed more than 30% in the past six months.

It's tough to rely on a sample size of three.

Instead, if we focus on times when the ratio jumped 30% or more over six months, we see mixed returns going forward. Three months later, gold outperformed silver most of the time, but few lasted longer than that. Over the past 40 years, there have been essentially no instances when gold kept chugging higher relative to silver (gold's several-month outperformance in 1998 and 2008 were erased in ensuing months).

Absolute returns in gold were about in line with random. The last few signals saw gold struggle on some time frames, but showed positive returns after six months. Before that, its one-year returns were questionable.

Silver has been more of a boom-and-bust market; we see that below with its exceptionally volatile returns. Its best performance was over the next six months when it suffered three losses versus seven gains, and only one of those losses was severe. But it had a lot of trouble holding onto those gains in the months afterward.

A decent sign for stocks (especially value)

These were also mixed signals for stocks. One could argue that a spike in the ratio of gold to silver indicates investor panic. If so, it isn't a very compelling buy signal. The S&P 500's returns going forward were okay, but nothing stood out. It has been more convincing in recent decades, but it was too early to suggest an extreme sentiment during the 2008 global financial crisis. 

Among factors, value stocks stood out for the most impressive long-term returns.

They were also the most consistently positive factor in the months ahead, with a 90% win rate over six and twelve months.

What the research tells us...

Gold has generated massive attention in recent months, and for good reason. It has done precisely what its boosters suggest it should do during a volatile and convoluted period for most other markets. And like any market that does well, now investors want a bigger piece.

Silver often takes a back seat to gold, and there are some good reasons for that. It's more exposed to economic forces, which can work in its favor...or not. The "or not" has been more of a factor this year due to a historic level of economic uncertainty. Silver bulls could take some solace in the extreme dislocation of the gold/silver ratio, but that may only mean that silver does less badly than gold going forward. For those intent on exposure to precious metals, it may be a better bet based on their historical relationship.