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What Is the Silver-Gold Ratio Telling Us About the State of the Global Economy?

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Over the last several weeks, we’ve spotlighted a lot of data indicating the economy isn’t nearly as strong as the mainstream pundits keep telling us. We’ve focused on the collapsing retail sector.  We’ve looked at household debt and US consumer stress. We’ve talked a lot about the US federal debt and its potential impact on the economy.

There’s another factor that indicates there may be some cracks in the global economy – the silver-gold ratio.

We’ve talked a lot about the silver-gold ratio as it relates directly to the silver market. In simplest terms, it indicates that silver is at a bargain price. The ratio currently stands at over 81 to 1. That means it takes 81 ounces of silver to buy an ounce of gold. Compare that with the historic average ratio which hovers around 16:1. The modern average over the last century is around 40:1. As Peter Schiff said in a video over the summer, “This is silver on sale.”

But the silver-gold ratio could also be signaling lack of confidence in the economy.

The silver-gold ratio is currently 7% higher than the 10-year average and stands at the highest level in two years, according to data analyzed by WSJ Market Data Group. According to a MarketWatch report, some investors view this as a negative economic indicator. Since silver is an important industrial metal as well as an investment metal, it is more sensitive to economic factors. If industrial output begins to slow, it can put downward pressure on the price of silver.

Money managers tend to favor gold when they think markets might turn rocky and discard silver when they are worried about slower global growth crimping consumption. Industrial uses account for about 55% of demand for silver, according to the Silver Institute, leading some traders to link it more with base metals like copper and others. The precious metals ratio last stayed above 80 in early 2016, when worries about a Chinese economic slowdown roiled markets, and in 2008 during the financial crisis.”

Silver inventories also provide a glimpse into the health of the economy. As industrial demand falls, inventories build up. Indeed, the amount of silver stored in depositories approved by CME Group Inc. jumped 16% to 251 million ounces from the start of August to the end of February. This could be a canary in the coal mine warning of a global economic slowdown.

Some analysts said worries that the global economy could slow down have also hurt silver. Similar concerns following mixed economic data and protectionist trade policies have dragged down copper and other industrial metals, with some investors betting that slower growth will weaken commodity demand.”

If the silver-gold ratio is showing cracks in the global economy, the news isn’t all bad. It could be a boon for investors.

Obviously, you want to buy something when it is on sale. We know the silver-gold ratio is signaling silver is on sale. This might be a great time to buy. Even if the global economy tanks and industrial demand for silver falls, that doesn’t mean the absolute price will drop. Investment demand has historically climbed along with gold during economic downturns. Investment demand for silver has been extremely low over the last year or so. Even though the price spread between the two metals may remain wide, the price of silver will likely move upward along with gold if the economy unravels, even if it doesn’t climb as quickly as gold.

And at some point, the wide silver-gold ratio will likely close, giving silver a tremendous amount of potential upside in the future. As we reported recently, silver currently looks like a relatively low-risk high-reward bet.

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