Blow-offs in the gold/silver ratio are rare and nearly always game-changing. While the past is not a perfect predictor of the future, we view the blow-off happening now as a powerful signal that silver is shifting into higher gear as it rallies to catch up with gold. This fundamental change in the relationship between these two metals could last for years.
Blow-off tops (marked by arrows in the 35-year chart of the gold/silver ratio above) tend to correspond with the early innings of a major, bull market in silver. Perhaps the one that interests us most is the decline that took the ratio from a high of 82 to a low of 32. This decline corresponded with a powerful rally that saw silver soar from a low just above $8.00 per ounce in 2008 to a high just below $50 per ounce in early 2011.
Data Source: Futuresource
2008 marked the beginning of the “Great Recession.” 2020 could go down in history as the beginning of what could be an even “Greater Recession.” 2008 was an election year; so is 2020. Stocks crashed in both 2008 and in 2020. The events of 2008/2009 fundamentally changed the global economy. The events of 2020 are doing the same thing. The similarities between these two time periods are uncanny.
Silver got trashed 2008 (see chart below) because of its dual status as both a precious and industrial metal. Fears that an economic slowdown resulting from a crashing stock market would diminish industrial demand for silver sent it sharply lower at the onset of the 2008/2009 recession. COVID-19 did the same thing to silver as well. Prices took out key, multi-year lows, blowing the bulls out of the market in both cases.
Data Source: Futuresource
“The Best Cure for Low Prices Is Low Prices”
This old adage — from a time when traders screamed and gestured at each other while crowded in a trading “pit or “ring” — is just as valid today. Reduced demand leads to lower prices. When prices fall below the level needed to cover costs, production slows to a crawl or stops entirely. Supplies eventually drop far enough to cause a shortage. Shortages cause prices to rise again and begin the cycle anew. In a recession, demand for nearly everything drops. Prices follow.
Falling commodities are one thing, but when the prices of financial assets like stocks, bonds, and real estate get mauled by the bear it sets up a dangerous situation. Financial assets serve as collateral for trillions of dollars in loans. Failure to grow, or at least maintain the value of these assets, causes them to lose their value as collateral. This directly impacts the quality of the loans backed by this collateral. This has the potential to undermine confidence in the holders of these loans which tend to be banks – especially large, global investment banks.
Modern economies cannot function without solvent banks. For banks to stay solvent they need the value of the collateral backing their loans to remain stable. This is why the Fed rescued the banks at the beginning of the “Great Recession.” It is why they continue to fire the money cannons non-stop.
COVID-19 has shut down huge segments of the economy, threatening to drive the value of financial assets sharply lower. The Federal Reserve knows it cannot let this happen and has vowed to support banks. The trillions spent by the Fed to break the tide of falling prices due to COVID-19 is already many times the amount spent in 2008/2009. Expect this to double, and even triple again, before it is over.
The Federal Government, on the sidelines in 2008, is also jumping in and injecting trillions more. Classic price inflation may not be rearing its head yet, but it is alive in a different form. It is manifesting itself in gains for stocks and bonds – both of which are ridiculously (and artificially) expensive at current levels. We believe the huge amount of money being thrown at the problem will eventually lead to the return of classic price inflation.
- Source, Silver Bear Cafe