Gold/Silver Ratios, Equity Price Volatility

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Gold/Silver Ratios, Equity Price Volatility

Two items to cover:

#1: The ratio of gold to silver prices stands at 116 today, a historically unprecedented level.  In ancient times, the ratio was roughly 15:1.  When several European countries formed the Latin Monetary Union in 1865, the convertibility ratio was 15.5:1.  As for the modern price relationship between gold and silver, there is a chart below with the history of this ratio back to 1970 using World Bank data, and it shows:

  • Before the US came off the last vestiges of the gold standard in 1971, the ratio was 20:1, close to long run historical norms. 
  • The only time the ratio dropped much below 20:1 was in early 1980, when it hit 17.4:1 in January. Readers of a certain vintage will remember the Hunt brothers’ attempt to corner the silver market in that year.  Spot prices went from $6.20/ounce in January 1979 to $38.88 in January 1980 to $14.79 in January 1981.
  • Since then, the ratio has traveled several times between 40:1 and either 80:1 or 100:1, typically peaking during periods of geopolitical/financial uncertainty: January 1991 (Gulf War I), February 2003 (Gulf War II), November 2008 (Financial Crisis), and February 2016 (global recession fears).

So, are these fresh record highs for the gold/silver ratio a sign the end is nigh? The simple answer is “No”.  Silver’s demand profile is different from gold.  The Silver Institute reported just today that industrial demand in 2019 was 511 million ounces, 51% of total global silver consumption.  For gold, industrial demand is just 9%.  Investment demand matters much more to the yellow metal, primarily as a hedge against non-dollar currency weakness.  An ounce of gold is essentially 18 $100 bills in metallic form, and anyone who fears their currency will devalue against the greenback can buy gold as a hedge. 

Bottom line: silver prices won’t recover until the global economy and industrial production do, so the gold/silver ratio at all-time highs makes sense.  

#2: If the COVID Crisis “felt” worse than the Financial Crisis in terms of equity market volatility, that’s because it was:

  • The chart below shows the 30-day standard deviations of daily returns for the S&P 500 and Russell 2000 from 2007 to today.
  • The long run average is 1.0% for the S&P and 1.4% for the Russell.  That means that on any given day you can expect to see those sorts of moves in the indices without thinking anything is amiss.
  • These readings peaked out during the Financial Crisis at 5.0% on the S&P 500 (30 days ending November 21st, 2008) and 5.2% for the Russell (December 5th, 2008).
  • This time around, the peaks were 5.3% for the S&P 500 (April 8th) and 6.1% for the Russell (April 17th). 

Why this matters: as the chart below shows, equity price volatility lingers after the initial spike higher. In 2008, once the standard deviation of returns crossed over 2.0 (2x the normal level) in September they did not come down below 2.0 until April/May 2009. 

Also important: small cap (Russell) volatility is both higher than S&P volatility during a shock and lasts even longer than large cap vol once elevated. 

Bottom line: history says to expect higher-than-normal US equity volatility to remain at least 2x normal for several more months.  This fits with the framework we outlined in the Markets section of our full report, one where the pace/progress of the US economic restart impacts day-to-day stock prices quite noticeably even though the overall trend is neither especially bullish or bearish.