The Price of Gold and Silver Gave a Major Crisis Warning

The sharp movement in the gold-silver price ratio is very similar to what preceded the economic crises of 2008 and 2020, which could soon offer extremely attractive buying opportunities for traders and precious metals investors. It is also one of the indicators that bad times may soon be ahead for the economy.

The gold/silver price ratio jumped sharply higher and crossed the 100-ounce level – meaning that one ounce of gold costs more than 100 ounces of silver. Just a few weeks ago, one ounce of gold cost less than 90 ounces of silver. So, there is a very sharp movement going on right now. As you can see from the chart below, this is an exceptionally large movement in the perspective of the last few years.

To understand the significance of this movement, it is necessary to explain the dynamics of the price ratio of metals. As a rule, when precious metals are in a long-term uptrend, silver tends to appreciate faster than gold. We have not seen this yet during the current uptrend (since autumn 2022).

Silver has appreciated more or less by the same amount compared to gold, even slightly less. However, this may change in the future. But before that, the price ratio may temporarily move even higher (i.e. gold becomes even more expensive relative to silver).

In the Initial Phase of Crises, the Ratio has Increased Sharply

However, when both metals fall, silver tends to fall significantly faster. We are also seeing this during the current correction. Gold has fallen 3 percent in two days, while silver has fallen 9 percent in the same period.

In the early stages of crises, the gold/silver price ratio tends to spike sharply

We saw this during both the 2008 financial crisis and the 2020 coronavirus crisis. In 2008, the price ratio started moving rapidly upwards as early as August 2008 – a month before the collapse of Lehman Brothers, which is considered the starting point of the global financial crisis. In the 2020 coronavirus crisis, the movement accelerated as early as February of the same year. Finally, the price ratio reached 127, which is the highest level in histor y according to current data.

The reason lies in the fact that in a financial crisis, financial institutions and investors usually experience liquidity problems, which means that they start to run out of money to cover their obligations. The reason for this is that investors have largely purchased financial assets with leverage and used assets as collateral, the value of which falls rapidly in a financial crisis.

In order to meet their obligations, they are forced to sell assets.

Gold and silver are among the first assets to be sold in the early stages of a crisis

In both the 2008 and 2020 crises, this led to a temporary but sharp drop in the price of gold and silver. The fact that more than half of the demand for silver is industrial demand, which tends to be hit hard during an economic downturn, also plays a major role.

An Initial Decline was Followed by a Rapid Rise

However, after the initial panic subsided and clarity set in, precious metals began to rise very quickly after both the 2008 and 2020 crises.

Usually, the response to the crisis has also been clear by then – in both cases, it was an increase in government spending (and an increase in the budget deficit) and massive money printing by the central bank. These are also the reasons why precious metals showed such a rapid rise in the “next” phase of the crisis.

And as you can see from the graph above, in the years following the crisis, silver has risen many times faster than gold, which is reflected in the decline in the price ratio of gold to silver. In 2008-2011, the price ratio fell from 90 to 30, and after the corona crisis, from 127 to 62. In the first case, silver rose three times faster than gold, in the second case twice as fast.

However, the chart below shows how quickly gold moved up after the 2008 financial crisis. Silver rose three times faster.

The Current Movement Gives us a Crisis Warning

As they say, history does not repeat itself, but rhymes. This also applies to this analysis. In the case of the gold/silver price ratio, it is only one indicator and it would certainly be useful to look at the situation more broadly, which I will certainly do in the following analyses. In this respect, the current movement of the gold/silver price ratio has clearly given us a crisis warning, because it rhymes with previous crises.

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If the escalation of the tariff war were to lead to some kind of financial crisis in the US, we could see very sudden and aggressive movements in the precious metals market in the short term. The scale of the tariffs imposed by the United States on the world in early April is much greater than anyone feared and has a major impact on the global economy.

If the crisis deepens and a financial crisis breaks out, the gold/silver price ratio is unlikely to have peaked yet. If it does, however, it could present an extraordinary opportunity for investors. It is not yet known what level it might be.

It is also important to understand that market timing is a very risky activity and it generally does not make sense for a long-term investor to do it.

Further updates will come out in future articles.