Gold is undervalued in relation to silver, as suggested by the current silver-to-gold ratio, yet there are additional factors influencing this investment dynamic.
Gold and silver are precious metals with distinct market dynamics, contrary to the belief that silver is undervalued relative to gold based solely on their price difference.
The argument hinges on various factors, such as demand structure, market capitalization, regulatory influences, and supply-demand balance.
Firstly, gold benefits from significant central bank demand, with institutions acquiring over 1,136 tons in 2024. Conversely, silver's demand comes primarily from retail investment, which saw a 27% drop in coin sales during the same period. Furthermore, the shift in silver's value towards industrial applications—solar panels and electronics—distinguishes it from gold, which maintains its monetary status.
Secondly, silver's smaller market capitalization makes it more susceptible to derivatives market influences, where synthetic supply can distort prices. Additionally, the derivatives market structure exacerbates the gold-silver ratio divergence due to the creation of synthetic supply, disproportionately impacting silver due to its smaller market size.
Regulations like Basel III, which incentivize banks to stockpile physical gold as Tier 1 capital, also contribute to gold's demand, while global macroeconomic factors, such as trade tensions, can cap silver's upside potential compared to gold.
Silver faces a structural deficit, requiring inventory drawdowns to meet demand, which supports price stability but also reflects supply constraints. Despite potential price increases due to industrial demand and supply constraints, forecasts suggest that silver may not significantly outperform gold without a reduction in trade tensions.
In conclusion, while the gold-silver ratio could indicate a bargain for silver, its value relative to gold is influenced by more than just price ratios, including demand dynamics, market structures, and economic conditions.
Investing in real-estate may not be the direct comparison, but the factors influencing the relative value of silver to gold could be applied. Firstly, the industrial application of silver, such as solar panels and electronics, increases its market capitalization vulnerability to derivatives, making it prone to price distortions like synthetic supply (similar to how commercial or industrial properties can be affected by market changes, manipulations, or fluctuations in demand and supply). Secondly, the smaller market capitalization of silver, like a smaller real-estate development firm, makes it more susceptible to regulatory influences, as seen with Basel III, which incentivizes banks to stockpile physical gold (similarly, government regulations can have a significant impact on the profitability and growth potential of a smaller real-estate firm).
