Crisis and Generational Opportunity - Trading the Gold to Silver Ratio During a Global Economic Collapse

While the world panics and makes decisions based on reactions to “unexpected” circumstances - those who can anticipate crises using objective data can take advantage of generational opportunities in markets.

Let’s reflect on the biggest financial crisis in recent history to illuminate the interplay between gold, silver and stock markets during this time - and help identify clear opportunities within this dynamic. How did gold and silver fare, while other markets collapsed during our most recent financial crisis? As gold is a global safe haven asset, and it also benefits from increased liquidity - This places it in the unique position where it gains value when liquidity increases - in the euphoric phase of the macrocycle (along with stocks) - and continues to gain value during the crash (while stocks and land take a beating).

So, while gold and silver can experience some short-term volatility during the crash phase - their long-term uptrends tend to remain intact, as they continue gaining value during the crash - while stocks and land struggle - as investors and institutions seek shelter during the storm of systemic collapse.

Let’s dig into the interplay between Gold and Silver specifically.

The gold-to-silver ratio tells us how many ounces of silver give us one ounce of gold. When this ratio is high, silver is objectively undervalued when priced in gold. Once this ratio falls off, this provides an opportunity to buy silver with the view of trading it in for gold. There is widespread debate on the appropriate level for the gold-to-silver ratio, which has ranged from 1:1 to 1:125—where it should sit would depend on who you ask. 

When Sir Isaac Newton, who was Master of the Royal Mint, introduced a fixed ratio between silver and gold, the ratio he applied was 15.5:1. Regardless of what one believes the ratio should be at - if silver is bought when the ratio is high and traded for gold when the ratio is lower, investors have done well to capture capital growth while securing a hedge against inflation and systemic collapses.

To understand silver’s position in this phase of the cycle - let’s analyse how the gold-to-silver ratio performed during the last Global Financial Crisis. We recorded major volatility in the gold-to-silver ratio in the previous financial crisis. For four months, between August and December 2008, during the height of the GFC, when everyone was seeking shelter from the storm, the GSR shot up to 82, creating a generational buy opportunity for silver. Following this it fell to 35 as investors noticed precious metals outperforming almost every market, causing a generational bull run in silver markets.

The reason for this is that while investors are seeking shelter from the storm, they pile into gold. Once the masses notice and believe the secular bull run in gold - they pile into silver as the second-in-line precious metal. 

With its smaller market capitalisation and sudden increased demand, silver's price skyrocketed, closing the gap between gold and silver and causing the gold-to-silver ratio to fall off a cliff.

The GSR (currently at 84) is a ratio that silver investors can use to track their swaps between gold and silver and one that will become increasingly relevant in this current and the upcoming phase of the 18.6-year economic cycle.