Gold's chameleon-like rally

RALLY: Gold (GLD (NYSE:GLD)) prices have broken $2,400 per ounce, setting a new all-time-high, up by 13% this year, and triple the rally of broader commodities. Silver (SLV) prices have done better given their traditional higher beta to gold prices and their low gold/silver ratio valuation versus history (see chart). But it’s been an unbalanced chameleon-like gold rally that brings plenty of risks. The rally has been driven by demand for geopolitical and inflation hedges, alongside central bank demand. With traditional gold drivers lacking. As the US dollar strengthened and bond yields rose. Alongside outflows from gold ETFs and lagging of gold stock proxies (GDX (NYSE:GDX)).

DRIVERS: The rally has been mainly driven by safer haven demand. As geopolitical risks from Ukraine to the mid-East have stayed high, and inflation declines stalled. Whilst central banks have stayed strong gold buyers to rebalance their foreign exchange reserves. But the gold rally foundations are narrow and traditional drivers been lacking. The stronger dollar has depressed demand from overseas buyers. Higher US bond yields have increased the competition for non-yielding gold. Gold ETFs have seen outflows as ‘digital gold’ Bitcoin has dramatically outperformed. This represents a significant generational divide in long term hard-asset demand.

RATIO: The gold/silver ratio, also known as the ‘Mint Ratio’, measures how many ounces of silver are needed to purchase one of gold. The two prices are strongly related with a correlation around 0.8 the past two decades. Whilst silver is historically around twice as volatile, reflecting its smaller market size and more industrial end uses. It currently needs 82 ounces to buy one of gold. This is around 20% above the forty-year average level (see chart). The higher the ratio the ‘cheaper’ silver is relative to gold. Both prices freely trade today but their relationship has been often fixed in the past. At 12:1 during the Roman Empire, and 16:1 in the US during the 1800s.