Most of the time, we spend our column inches on assets priced in fiat currency like gold, bitcoin, oil against the dollar, or the euro etc. However, there are times in an asset’s cycle when studying the price against other assets can be very instructive. In fact, there are traders who rarely check the fiat price of the assets they trade. It can initially be confusing for those who always use their national currency as the benchmark of asset performance, but for gold bugs and crypto holders (to name two), it’s anything but.
Why chart one asset against another?
This is primarily a function of your goals. For most traders, it’s all about accumulating fiat. The US dollar, for example, is taken as the benchmark of their portfolio’s performance, and they will go from USD into other assets and back again, the goal being to enter and exit trades at the right times so as to constantly grow the dollar balance of one’s account.
However, some traders are not interested in accumulating fiat currency. A certain breed of gold and crypto trader is primarily concerned in accumulating more gold and bitcoin, respectively. This could be because they take a negative view of fiat currency in general, or expect these hard assets to massively outperform government scrip over the long run. By trading within precious metals markets for the gold bug, and within the broader crypto market for the bitcoin trader, they attempt to increase their holdings without ever having to convert into fiat. The reason it’s important for the rest of us is that within those asset-to-asset pairings we rarely ever look at, there can be a great deal of actionable information.
A very brief history of the gold/silver ratio
In our freely floating fiat age, we expect asset values to fluctuate relative to one another, but this hasn’t always been the case. Precious metals like gold have historically been used as stable pegs, both to national currencies and to each other. In Roman times, the gold/silver ratio was fixed at around 12 to 1 (12 ounces of silver to an ounce of gold). At the end of the 18th century, the US government fixed the ratio to 15 to 1, and by the end of the 19th century it had been fixed, almost universally, at that same 15 to 1 ratio. The 20th century has been a century of World Wars, financial crises, and the untethering of markets. In this period, the gold/silver ratio has gone from just under 18 in 1919, to just shy of 98 in 1940. The latter half of the century has seen it going from lows just over 30 in 2011, to all-time highs beyond 120 during last year’s COVID-19 crash.
The gold/silver, bitcoin/altcoin parallel
There’s an interesting parallel to the gold/silver ratio in crypto markets. In crypto, bitcoin acts as gold, and other “altcoins” play the role of silver to bitcoin’s gold. Like silver, altcoin markets are smaller and more volatile. In risk-off phases, liquidity floods back into bitcoin, as it does to gold. In risk-on phases, it floods into altcoins, as it does with silver. This accounts for the volatility of both silver and altcoin markets. They are smaller vessels being filled with, and drained of, large volumes of liquidity at different stages of the market cycle as speculators shift from the bigger, safer bet, to the smaller, riskier play.
From the recent lows in 2011 to the highs in March of last year, gold rallied almost 300% against silver. In 2019 alone, it swung 50% up from January to March, and then 45% down from March to September. For a precious metals trader, the lure of doubling their gold holdings in less than a year without exiting to fiat is irresistible. For the rest of us, not only does the pairing hint at which of the two should be focused on at what times, but it also tells us how gold holders are feeling about the broader economy at a different resolution than the gold-dollar pairing. In this specific instance, that sentiment is all about the state of the post-COVID recovery and the much-discussed reflation trade.
Looking back at 2020’s price action, we see the mass exit from silver into gold as the global economy grinds to a halt, and then we see a tentative return to risk-on in May and June before full steam ahead into September. What’s intriguing here is the support level that seems to be forming at around 70. We were there in August, September, December, and again at the beginning of January. You have to think that if reflation is to shift into full swing and economies to start going back to normal, then we’re going to have to see a break below that level in the gold/silver ratio.
Daily Gold/Silver ratio throughout 2020. Source: TradingView
So, in silver we have a precious metal, like gold, with limited supply and other store-of-value characteristics; but we also have a metal that’s invaluable to industry (solar panels, batteries, and semiconductors to name three uses). In our present economic climate, in which we’re collectively trying to grow out of the current crisis amidst soaring government debt, low rates and unprecedented monetary expansion (scenarios in which gold tends to thrive), can silver be all things to all people in 2021?
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