Beijing News Network:
Although gold and silver often move in sync, their relationship can sometimes be quite complex. Despite having similar characteristics and applications, differences in potential demand and supply dynamics can lead to occasional divergences. Octa Brokers has discovered the subtle differences behind the gold-silver correlation and explored potential trading opportunities using the gold-silver ratio.
Over the past 40 years, gold and silver have exhibited a strong positive correlation.
● Both commodities are precious metals and are often considered substitutes.
● The demand structure of both commodities is similar, but there are significant differences in demand composition.
● Sometimes the correlation between gold and silver is negative, but this is not frequent.
● The supply of silver is five times that of gold.
● The gold-silver ratio is the oldest continuously tracked exchange rate in history.
● Traders monitor the gold-silver ratio to identify anomalies in the valuation of precious metals.
● Asian countries are among the world’s largest importers of gold.
The positive correlation between gold and silver seems to be a completely natural phenomenon. These two commodities have related applications, very similar characteristics, and are often found and extracted in the same geological locations. Therefore, considering them as close substitutes and expecting their prices to be closely related is entirely intuitive. However, upon closer examination, we find important subtle differences and complexities in the price movements of gold and silver.
Correlation Coefficients
In statistics, the correlation coefficient measures the strength and direction of the relationship between two variables. When it equals 1, the correlation is perfectly positive – as the price of one commodity rises, the price of the other commodity also rises (and vice versa). In the case of gold and silver, this correlation is highly positive, almost perfect, meaning that the prices of these two commodities often rise and fall simultaneously. Octa Brokers studied the daily closing prices of gold and silver from July 1982 to October 2024 and found a correlation coefficient of about 0.92 between the two commodities.
Why is the correlation positive
The very close statistical relationship between gold and silver is reflected in their similar real-world applications. Both commodities are precious metals, often bought and sold for similar reasons. In fact, according to data from the World Gold Council and the Silver Institute, jewelry accounts for 49% of gold demand and 27% of silver demand. Additionally, both commodities are often considered “safe-haven assets” or “stores of value.” People often buy gold and silver to protect their capital from the effects of inflation. Therefore, private investment accounts for 30% of gold demand and 15% of silver demand.
Furthermore, both metals have industrial applications, but unlike gold, silver is primarily used for manufacturing and industrial purposes. Industrial usage accounts for 58% of silver demand, compared to only 11% of gold demand. Another important difference is that central banks continue to view gold as pure currency and remain active buyers of gold to this day. Octa Brokers calculated that over the past four years, global central banks purchased over 1,000 tons of gold. According to data from the World Gold Council, central bank purchases accounted for nearly 20% of total gold demand in the second quarter of 2024.
Although the demand structure for these two metals is very similar, with essentially only three sources – jewelry, investment, and industry – the relative shares of these sources are quite different. Silver is a quasi-industrial precious metal, while gold still has important monetary functions, said Kar Yong Ang, financial market analyst at Octa Brokers.
These subtle but important differences explain why the correlation between gold and silver prices can sometimes break down. In 2020, the global economic recession sparked by the coronavirus pandemic led to a sharp decline in industrial demand for silver, while at the same time, interest in gold as a protective asset was higher in uncertain times. Kar Yong Ang, a financial market analyst at Octa Brokers, said, “Silver is more sensitive to economic cycles than gold because the investment theory for silver is not as obvious, and its industrial usage is more widespread.”
Why is silver cheaper than gold
There is also a huge difference in supply between gold and silver – gold is much scarcer than silver. According to data from the World Metal Statistics Bureau, gold production in 2023 was around 3,100 tons, while silver production was 25,200 tons. This is why, based on ounces, silver has always been cheaper than gold. As of October 4, the COMEX silver price was $32.17 per ounce, while gold closed at $2,652.25 per ounce.
What is the gold-silver ratio
The gold-silver ratio is a popular method for measuring the price difference between gold and silver. This is the oldest continuously monitored exchange rate in history. This ratio shows how many units of silver are needed to purchase one unit of gold – it existed long before gold futures began trading on the COMEX in 1982. In ancient Egypt, King Menes established the gold-silver ratio at 2.5:1. Subsequently, in 210 BC, the Roman Empire officially set the ratio at 8:1. Since then, this ratio has undergone significant changes, but overall has shown an upward trend, partly due to government manipulation of currency supply and also due to the discovery of large silver mines in South America.
To calculate the gold-silver ratio, the current gold market price is divided by the current silver market price. As of October 4, the gold-silver ratio was 82.44, meaning that one ounce of gold can purchase 82 ounces of silver, or in other words, purchasing one ounce of gold requires 82 ounces of silver.
Traders often monitor the gold-silver ratio to identify anomalies in the relative valuation of precious metals. A high ratio relative to historical standards indicates that silver is undervalued relative to gold, while a low ratio indicates the opposite. In other words, when the ratio deviates significantly from its historical norm or long-term average, traders bet that it will return to normal with relatively low risk.
Kar Yong Ang, financial market analyst at Octa Brokers, provided the following example:
In March 2020, the gold-silver ratio rose to over 120, more than 40% above the long-term average level, indicating that silver was extremely cheap relative to gold, and gold was extremely expensive relative to silver. In this case, traders could sell gold or buy silver. However, the wisest decision would be to do both. This way, traders can take advantage of the ratio itself, essentially betting that the ratio will return to normal with relatively low risk.
Gold in South Asia and Southeast Asia
Gold plays a crucial role in the traditions and cultures of South Asian and Southeast Asian countries. In addition to being a safe-haven asset, it is also seen as a symbol of prosperity and is often used to consolidate status and wealth. Owning gold jewelry or ornaments has always been a traditional way of displaying wealth. Additionally, gold has significant religious significance, especially in India, where it is closely associated with Hindu mythology and often linked to sacred rituals. Overall, Asian countries are among the world’s largest importers of gold. In fact, only four Asian countries – China, India, Singapore, and Thailand – account for more than one-third of global gold imports, about 39%.
About Octa
Octa is an international broker that has been providing online trading services globally since 2011. It offers commission-free financial market access and a variety of services to clients from 180 countries, who have opened over 52 million trading accounts. To help clients achieve their investment goals, Octa provides free educational webinars, articles, and analysis tools.
The company is involved in a comprehensive network of charitable and humanitarian initiatives, including improving educational infrastructure and supporting local community emergency relief projects.
Since its inception, Octa has received over 70 awards, including the “Best Forex Broker of 2023” award from AllForexRating and the “Best Mobile Trading Platform of 2024” award from Global Brand Magazine.
