Gold and Silver prices analysis

Over the current year, gold has increased in price by more than 7%. At the same time, silver fell from $23.96 to $22.52 in the spot market, i.e., by almost 6%. What is the reason for this mixed movement, and should we expect the price of silver to turn around and begin to rise eventually? Let's talk about this in our article today.

Gold-to-Silver ratio

We studied the prices of silver and gold over the past ten years (i.e., since 2013) and conducted a regression analysis. It's no secret that the prices of these two metals are highly correlated. The period we studied showed a correlation coefficient of 0.57.

From the 1930s until the crisis years of 2007-2008, the gold/silver ratio was about 33. In 2007, however, gold took off. Between 2008 and today, its price has risen 135%. During the same period, the price of silver rose only 53%.

Interestingly, 2007-2008 was the end of the 4th Kondratieff Wave, which began in 1949 and lasted 58 years, marking the peak of globalization.

In 1979, the United States and China signed a strategic agreement that led to the collapse of the socialist camp and the U.S. victory in the Cold War. By that point, the Soviet economic miracle had ended and entered stagnation. Shortly after, the USSR collapsed in 1991. 

In 1993, the formation of a Unified World Economy began. By then, the European Economic Community had existed for 36 years, and the European Free Trade Association (EFTA) had existed for 33 years. In fact, Europe came to the moment of formation of the Unified Monetary System (EMS) quite prepared. The system lasted until the main global financial crisis of the 2000s.

Crossing the line in 2008 was a turning point for the US economy – the beginning of an era of ultra-low interest rates. If the Fed could move the key quickly by 8-10% in the second half of the 20th century, doing so became challenging after the subprime crisis. The FOMC no longer had as much room for maneuver, which resulted in gold's complete transformation into a safe-haven asset.

You can see evidence of this over the 10-year period we analyzed. The silver-gold price spread widened from 33 to 77 points. If, from 2013 to 2015, the ratio remained consistently below the benchmark of 77, then from 2016 to 2019, the spread began to widen to 90-91 points. The fact is that the Fed started another cycle of rate hikes, bringing it to 2.5% by June 2019. The risk-off in the market led to an allocation to gold, which increased by 9%.

However, the spread reached its greatest value precisely in 2020, when the FOMC sharply reduced the rate and launched QE. The gold-to-silver ratio has reached 112. Currently, we see a ratio of 87 points.

If the analysis based on the wave approach is correct, we are likely to see a further widening of the spread. The rise in the price of silver will not keep pace with the increase in the price of gold.

Silver prices forecast

The Silver Institute, founded in 1971 and dedicated to studying silver, has published a market report that appears moderately optimistic.

Firstly, despite the slowdown in demand for silver in 2023 by 6%, the Institute still predicted an excess of demand over supply of 1024.9M vs. 1167M.

Analysts expect the silver demand growth will continue in the long term. At the same time, the prospects for production over a period of 4-5 years are rather negative. The institute attributes the decline in production to the depletion of reserves but notes that production growth could resume if Pan American Silver restarts the Escobal mine in Guatemala.

Silver technical analysis

The medium-term technical outlook for the silver market remains negative. The price is in a bearish price channel. The nearest support is at 22.33, where the Fibo correction level of 38.2% is located.

If a breakdown occurs, the bears may return the price to 21.55 and then to 20.51.

The strong support cluster is between 19.90 and 20.51. This zone was formed by the local lowest low from March 2023 and the Fibo correction level of 23.6%.  

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