Unraveling the Gold and Silver Correlation A Closer Look at the Dynamics

Gold and silver often move in tandem, but their relationship is more complex than it appears. While both are precious metals with similar uses, differences in their underlying demand and supply factors can lead to occasional divergence in their price movements. Octa Broker delves into the intricacies of the gold-silver correlation and explores potential trading strategies based on the gold-silver ratio.

For the past 40 years, gold and silver have shown a strong positive correlation, as both are considered precious metals and are frequently treated as substitutes. However, despite sharing similar demand structures, there are key differences in how these two metals are used. Although rare, there have been periods when their correlation turned negative. A notable difference between them is that silver’s supply is about five times greater than gold’s. Additionally, the gold-silver ratio is the longest continuously tracked exchange rate in history, and traders use this ratio to identify discrepancies in the valuation of these precious metals. Asian countries are major global importers of gold, adding another layer to the correlation.

At first glance, the positive correlation between gold and silver seems natural. Both metals are sought after for similar purposes, share many physical properties, and are often found together in nature, making them intuitive substitutes. However, a deeper analysis reveals significant complexities behind their price movements.

The Gold-Silver Correlation: A Statistical Overview

The correlation coefficient between gold and silver measures the strength and direction of their relationship. A coefficient of 1 means perfect positive correlation, where both prices move in sync. For gold and silver, the correlation is strong and nearly perfect, with a coefficient of around 0.92, based on data from July 1982 to October 2024, showing that the two metals generally rise and fall together.

Why the Correlation Is Positive

The close correlation between gold and silver reflects their similar roles in the global market. Both are precious metals used for similar reasons, including as stores of value and safe-haven assets. According to the World Gold Council and Silver Institute, jewelry accounts for 49% of gold demand and 27% of silver demand. Additionally, private investment makes up 30% of gold demand and 15% of silver.

Both metals also serve industrial purposes, although the breakdown is very different. Industrial usage represents 58% of silver demand, while only 11% of gold is used in industry. Moreover, central banks continue to treat gold as money, with active purchases of bullion. Over the past four years, central banks have bought over 1,000 tons of gold, and in Q2 2024, central bank demand accounted for nearly 20% of total gold demand.

Kar Yong Ang, a financial market analyst at Octa Broker, highlights this distinction: “Silver is a quasi-industrial precious metal, while gold retains its status as a monetary asset.”

These structural differences explain why, at times, the gold-silver correlation has diverged. For example, during the global economic downturn in 2020 caused by the coronavirus pandemic, industrial demand for silver plummeted, while gold demand surged as investors sought safe-haven assets. Ang notes that “silver is more sensitive to economic cycles than gold, as its investment appeal is less pronounced, and its industrial usage more widespread.”

Why Silver is Cheaper than Gold

One major distinction between gold and silver is their relative scarcity. Gold is much rarer than silver, which explains why silver has traditionally been priced lower per troy ounce. In 2023, the world produced 3,100 tons of gold and 25,200 tons of silver. As of October 2024, silver traded at $32.17 per ounce, while gold was priced at $2,652.25 per ounce.

Understanding the Gold-to-Silver Ratio

The gold-silver ratio is a historic measure of the relative value between the two metals. This ratio shows how many ounces of silver are needed to purchase one ounce of gold. The ratio has fluctuated over time, influenced by economic factors such as government policies and the discovery of large silver deposits.

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As of October 2024, the gold-silver ratio stood at 82.44, meaning one ounce of gold could buy 82 ounces of silver. Traders often monitor the ratio for anomalies in metal valuations. A high ratio, compared to historical norms, suggests silver is undervalued relative to gold, and a low ratio suggests the opposite. When the ratio deviates significantly from its long-term average, traders often bet that it will return to its historical equilibrium.

For instance, during March 2020, the gold-silver ratio surged above 120, more than 40% above its long-term average. This indicated that silver was extremely undervalued compared to gold. In such cases, traders could either sell gold or buy silver, or even take both positions to capitalize on the expected return to normality.

Gold’s Cultural and Economic Role in Asia

Gold holds immense cultural and economic significance in South and Southeast Asia. In countries like India, China, Thailand, and Singapore, gold is not just a financial asset but also a symbol of wealth, prosperity, and status. In India, gold is deeply entwined with Hindu rituals and is often gifted during weddings and religious ceremonies. In fact, Asian nations account for a significant portion of global gold imports, with China, India, Singapore, and Thailand collectively importing around 39% of the world’s gold.

While the gold-silver correlation is often strong, understanding the nuances of this relationship is crucial for traders. Key factors, such as the metals’ distinct industrial applications, their role as stores of value, and supply-demand dynamics, can all influence their price movements in complex ways. By monitoring the gold-silver ratio and understanding its historical trends, traders can identify potential opportunities for profit. Whether looking at the traditional safe-haven status of gold or the industrial demand for silver, each metal offers unique insights into global economic trends. Learn More