Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reviving the Gold Silver Ratio Trade
Transcript
- Lucas: So the gold-silver ratio just hit sixty-four point three. That's the highest we've seen in five years. And in the past five days, silver is down more than seven percent while gold has barely budged. Luna: I noticed that too. Silver got absolutely hammered this week. It's trading around sixty-five dollars an ounce now, while gold is still comfortably above four thousand. Lucas: Right. And that divergence is exactly what gets people talking about the gold-silver ratio. The ratio tells you how many ounces of silver it takes to buy one ounce of gold. At sixty-four, you need sixty-four ounces of silver to buy a single ounce of gold. Luna: Historically, the long-term average is around fifty-five or so. But in stagflationary environments, the ratio tends to widen. It happened in the seventies. Lucas: It did. In the 1970s, the ratio swung wildly. It started the decade at about fifteen, then blew out to over fifty by the late seventies before collapsing back. The pattern is that industrial metals like silver get crushed when growth slows, while gold holds up because it's a store of value. Luna: And that's exactly what we're seeing now. GDP growth is running at one point six percent annualised, core CPI is still above three percent. The market is pricing in a recession, and silver is an industrial metal. It's used in solar panels, electronics, medical devices. Lucas: If demand for those things falls, silver gets sold off. Gold doesn't have that same industrial exposure. So the ratio becomes a bet on whether the economy is going to get worse or better. A rising ratio means the market is pricing in more pain. Luna: And we have the data to back that up. Job openings ticked up a bit in April to seven point six million, but claims are still elevated. The labor market is softening, not collapsing, but it's not strong either. Lucas: The thing that caught my eye this week is the volume on the gold-silver ratio ETF. It's called GLTR? No, actually there's an ETF that directly tracks the ratio, but the point is, volume spiked. Big institutions are piling into this trade. Luna: Are they betting on the ratio going higher, or do they think it's due for a mean reversion? Lucas: From the options flow, it looks like a mix. Some are buying calls on the ratio, expecting it to go to seventy or eighty. Others are buying puts, betting that silver catches up. It's a real tug of war. Luna: I want to go back to the seventies comparison for a second. In the 1970s, the ratio peaked at around fifty, then collapsed when silver prices exploded in early 1980. The Hunt brothers tried to corner the silver market and sent prices to fifty dollars an ounce, which was huge back then. Lucas: That was a mania. And it ended badly. But the structural point is that in a recession, silver underperforms gold. If we are heading into a deeper recession, the ratio could easily test eighty. Some analysts are calling for ninety. Luna: Ninety seems extreme. At ninety, you're basically saying silver has no industrial value. But silver has a dual nature. It's both a monetary metal and an industrial one. The industrial demand floor is real. Solar manufacturing alone accounts for about twenty percent of annual silver demand. Lucas: That's a good point. And solar installations are still growing, even in a high-interest-rate environment. The Inflation Reduction Act subsidies are still flowing. So maybe silver doesn't fall as much as people fear. Luna: But the macro headwind is strong. The Fed just had its first meeting under new Chair Kevin Warsh. They held rates steady, but the tone was cautious. If they signal more hikes, that's bad for silver. Lucas: Yeah, the readout from that meeting was all about uncertainty. Warsh said they need to see more data before committing to a path. Higher for longer seems baked in. That's a headwind for all commodities, but gold seems to be shrugging it off. Luna: Gold is being supported by central bank buying and geopolitical tension. The Iran situation is still unresolved. Even if Hormuz relief comes, the economic toll is already baked in, as some analysts say. Lucas: So we have this fascinating setup. The ratio is at sixty-four, and it could go either way. The bulls say recession leads to eighty-plus. The bears say silver is oversold and due for a bounce. Luna: And there's a third camp: the ratio itself becomes a self-fulfilling prophecy. If enough big money piles into the trade, it drives the ratio further, and then the algos pile in, and it snowballs. Lucas: That's the part that makes me nervous. When everyone is leaning one way, the snapback can be violent. We saw it in 2020 during Covid. The ratio hit one hundred and twenty-five, then collapsed back to sixty in a matter of months. Luna: One hundred and twenty-five. That's insane. So if we hit eighty, could we see a similar collapse? Lucas: If the economy recovers, yes. But if we're stuck in stagflation for years, the ratio could stay elevated. It's not a timing game. It's a macro view. Luna: I think the key is watching industrial production data. The next ISM manufacturing print will be important. If it shows contraction, silver will get hit again. Lucas: And the CPI report in July. If inflation stays sticky, the Fed stays hawkish, and that's another leg up for the ratio. On the other hand, if inflation falls and the Fed pivots, silver could rally hard. Luna: I want to get your take on something. A listener emailed us asking whether they should hedge their portfolio by buying gold and shorting silver. Is that a sensible trade right now? Lucas: It's a high-conviction trade, but it's not without risk. The ratio is already elevated, so you're buying at a high point. If you're wrong, the move can be fast. I'd say it's more of a tactical trade than a long-term allocation. Luna: And you have to account for the cost of carry. Shorting silver costs money in a contango market. It's not a free trade. Lucas: Exactly. The ETFS that short silver have expense ratios that eat into returns. So you need a big move to make it worth it. Luna: Let's talk about something else that's happening. The gold miners are up. The GDX index is up three percent this week even as gold is flat. That's unusual. Lucas: That tells me the market is pricing in higher gold prices ahead. Miners are leveraged to the gold price. If gold goes up, their profits go up disproportionately. So maybe some smart money is positioning for a gold rally. Luna: But if the ratio is rising, that implies silver is falling. That's bad for silver miners. The silver miner ETF, SIL, is down this week. Lucas: Right, it's a tale of two sectors. Gold miners are in favour, silver miners are out of favour. That divergence won't last forever, but it's the reality right now. Luna: So what do you think the ratio will be at the end of the year? Lucas: If I had to guess, I'd say around seventy. The economy is slowing, inflation is sticky, the Fed is on hold. That's a recipe for a wider ratio. But if we get a surprise peace deal in Iran or a sharp drop in oil prices, that could change everything. Luna: I think the ratio stays elevated but doesn't break eighty. I'm with the solar demand camp. Silver has a floor. Lucas: That's a reasonable take. And it's worth noting that the ratio is a relative trade, not an absolute one. You can be bullish on both gold and silver but still expect gold to outperform. That's a different kind of trade. Luna: Right. And for retail investors, the easiest way to play it is just to buy gold and not worry about the ratio. Gold has been a great hedge in this environment. Lucas: Speaking of which, before we wrap up, I want to mention something. This show is ad-free and listener-supported. A small group of our listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's what keeps the lights on. If you've gotten value from these conversations, that's the way to keep them going. Luna: Yeah, it's a simple way to support the work we do. No ads, no sponsors, just the economics. We appreciate everyone who's already part of that. Lucas: Alright, back to the ratio. One more thing I want to look at: the correlation with real yields. Real yields have been rising, which usually hurts gold, but gold is holding up. That's interesting. Luna: The ten-year breakeven inflation rate is at two point two five percent. That's down slightly. So inflation expectations are moderating. Maybe that's why gold isn't rallying more. Lucas: But it's not falling either. That's the key. Gold is acting as a portfolio stabiliser. And as long as uncertainty is high, it will keep that role. Luna: So to sum up: the gold-silver ratio is at a five-year high, driven by stagflation fears. Silver is getting hammered on industrial demand concerns. Gold is holding up on safe-haven demand. The ratio could go higher or it could snap back. We'll be watching the data. Lucas: And we'll be back next week with another angle on the stagflation trade. Until then, keep your eyes on the ratio.