Investigating the Divergence of Gold and Silver returns.
- Otto Money
- May 1
- 3 min read
Updated: Oct 7
In recent years, the performance gap between gold and silver has widened significantly - prompting both curiosity and concern among investors. Gold has dramatically outperformed silver, defying traditional assumptions and raising questions about whether the historical gold-silver relationship still holds in today’s market landscape.
A Historical Perspective: The Gold-Silver Ratio
Historically, many investors have looked to the Gold-to-Silver Ratio as a guide for relative value. For centuries, this ratio hovered around 15:1, reflecting a natural abundance-based valuation. In more recent decades, it averaged closer to 50:1 to 60:1. However, in the past few years, the ratio has breached 100, marking a sharp divergence.
This has led many contrarian investors to believe silver is “undervalued” relative to gold and that a reversion to the mean is inevitable. Yet, despite these expectations, and recurring bullish narratives around silver, the convergence has not materialized. In fact, gold continues to extend its lead.
Why Has Gold Outperformed?
1. Safe Haven Demand & Global Uncertainty
Gold has long enjoyed its status as a safe haven during turbulent times. As global uncertainties - from geopolitical conflicts to inflationary shocks - have grown, central banks and institutional investors have increasingly stockpiled gold. In 2023 alone, central banks purchased more gold than in any year in recent history, reinforcing its role as a trusted store of value.
2. Broad-Based Institutional and Central Bank Support
While both metals are precious, gold benefits from broader institutional demand. Central banks don’t typically buy silver. Large ETFs and sovereign wealth funds also disproportionately favor gold, pushing its price upward during risk-off periods. We were unable to find any central banks with significant silver reserves.
Why Has Silver Lagged Behind?
1. Dual Identity: Precious and Industrial
Unlike gold, silver derives nearly 60% of its demand from industrial use. It is widely used in solar panels, electronics, and increasingly in battery technologies. While this offers long-term structural demand potential, it also means silver prices are more closely tied to economic growth cycles and manufacturing trends.
2. Not Suited for Large-Scale Storage
Even as a hedge asset, silver is less practical for storage. Its lower density makes it bulky and expensive to vault in large quantities. This reduces its attractiveness for institutional investors looking for compact, transportable stores of value. Only about 17% of the silver demand is for investments.
3. Misinterpreting the Supply-Demand Story
Yes, silver has seen demand-supply mismatches in recent years. But unlike gold, silver’s pricing is heavily affected by short-term industrial demand trends, especially from China and other large manufacturing economies. While this could eventually lead to price spikes, the trajectory is much harder to predict and does not necessarily support the narrative of it being a reliable safe haven.
Key Takeaways for Investors
The historical gold-silver ratio is not a reliable predictor of convergence in today’s markets.
Gold’s role as a monetary asset has only strengthened with time and global uncertainty.
Silver, despite its potential, is driven more by industrial demand than safe haven flows.
Allocation to silver should be modest, based on its economic cycle sensitivity—not legacy ratio theories.
Conclusion
Silver has increasingly behaved as a high beta industrial metal, not a gold substitute. Gold has retained its crown as the undisputed safe haven asset. However, it would be unwise to dismiss Silver entirely from the portfolio. Industrial uses are increasing and if gold gets toopricey, people may turn to silver as a more affordable alternative. It is an interesting space to watch!
As to how much Silver should be in your portfolio - consult a financial advisor. Of course, we recommend you to use a conflict-free investment advisor.
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