As the gold-to-silver ratio breaks through a critical support level, silver may be entering a new bull market.
The gold-to-silver ratio, which measures how many ounces of silver are needed to purchase one ounce of gold, has historically averaged between 40:1 and 60:1.
Two months ago, the ratio fell from a yearly high of 87:1 to 73:1, breaking a thirteen-year support level. Although it has since rebounded slightly, it remains around 76:1, still well above the historical average, indicating that silver is significantly undervalued compared to gold.
Analysts believe that this change, combined with the current upward trend in gold prices, signals a positive outlook for the silver market.
Historically, the gold-to-silver ratio tends to quickly return to its mean after reaching extreme highs.
In 2020, the ratio soared to a historic high of 123:1 due to the COVID-19 pandemic but later fell to around 60:1 under global central banks' monetary easing policies. Similarly, after the 2008 financial crisis, the ratio dropped from over 80:1 to 30:1.
It is noteworthy that silver often outperforms during gold bull markets.
For example, during the pandemic, gold rose by about 40%, while silver surged by 141%. Since the beginning of this year, spot gold has risen by less than 20%, whereas spot silver has soared nearly 30%.
Additionally, fundamental factors support an optimistic outlook for the silver market.
Currently, silver demand is expected to reach a record 1.2 billion ounces, while supply has not seen significant growth. This supply-demand imbalance, coupled with the increasing demand for silver in the solar energy market, suggests a potential structural shortage in the silver market.
According to a recent research paper by scientists at the University of New South Wales, the demand for silver from solar manufacturers could account for over 20% of the current annual supply by 2027. By 2050, solar panel production could consume 85-98% of the current global silver reserves. This growing demand will undoubtedly inject new vitality into the silver market.
