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Why Silver Will Outperform Gold Before the Precious Metals Rally Stops

Last Updated September 23, 2020 2:09 PM
Andrew Packer
Last Updated September 23, 2020 2:09 PM
  • Gold hit new all-time highs Monday.
  • Silver, meanwhile, is only around $24.
  • The grey metal will outperform gold from here.

Gold hit a new all-time high in dollar terms Monday, and silver rose to a seven-year high of $24. Most analysts see the metal moving far higher.

Silver Is the Winner in the Second Half of the Rally

With silver at $24 per ounce, the metal has been a clear laggard. To match gold at all-time highs, the metal needs to double to its 2011 peak of just over $49 per ounce .

What does that tell us?

On a percentage basis, silver looks like the stronger bet going forward.

The fact that gold hit new highs without the lesser precious metal going along indicates gold will likely continue to head higher as well.

It’s really only at the end of a major rally for the metals in general when both assets hit new highs at the same time.

This last occurred in 2011 when gold prices spiked from $1,500 to $1,900 in a matter of days .

Gold and silver prices
In the last 20 years, gold has outperformed silver, but silver tends to outperform right at the end of a massive rally for the metals. | Source: Kitco 

Before that, traders need to look to the soaring metals prices of the 1970s. In 1971, gold prices first surged as the U.S. cut the last connection between the dollar and gold .

Silver soared in the late 1970s and into 1980 as rising inflation rates sent everyday investors and the billionaire Hunt brothers  into the lower-priced metal.

Chances are this is what will happen again, plus or minus some billionaire trying to corner the market. Silver may look pricey now, but it has far more upside ahead than gold, although the yellow metal should continue its historic rally.

A Hint at When the Rally Will End

With the precious metals looking unstoppable right now, traders have a few ways to watch for telltale signs that the rally is about to end.

One of the best signs is to look at the gold-to-silver ratio . This ratio shows how many ounces of silver it takes to buy an ounce of gold.

Gold to Silver ratio
The gold-to-silver ratio shows how many ounces of silver it takes to buy an ounce of gold. The narrower the ratio gets, the more likely we’re at the end of a big move. | Source: Tradingview 

Most gold ever mined still exists somewhere thanks to the metal’s durability. Much of the silver that has been produced has been used up in industrial processes, photography, and even medicine. 

Geologically, there are about 19 ounces of silver for every ounce of gold in the ground. 

So, while it would make sense to see a ratio at or under 19, to reflect the metal that gets used up, the current ratio is about four times higher today.

What’s more, we can see from the 2011 spike in precious metals prices that the ratio contracted to around 30. In other words, it took 30 ounces of silver to buy an ounce of gold.

The closer the ratio gets, the more likely the rally in metals will have played out entirely. For the ratio to contract, silver prices need to outperform gold.

From here, silver looks like the best bet to shine as the precious metals rally takes off.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.