Gold is reaching new record highs almost every other day. The bullish pressure continues despite tighter financial conditions, with expectations of incoming rate cuts and high geopolitical risks. While gold has been surging, silver prices have remained mostly contained. This is because silver is more of an industrial metal than gold. Geopolitical risks affect gold more, while strong industrial output and investment in green energy support silver.
(XAUXAG Daily Chart)
While geopolitical risks remain very high, especially following yesterday’s embassy attack, the latest ISM manufacturing data from the US, along with stronger Eurozone and China manufacturing PMIs, indicates that the manufacturing sector may be on the brink of a recovery period. Additionally, the new wave of AI technology is expected to drive strong energy demand, which could also boost silver relative to gold in the coming months.
The gold/silver ratio has been contracting since 2020, and now it appears to be nearing a peak near the upper boundary. If it remains below 92, this aligns with the scenario where silver may outperform gold in the near future.
(XAUUSD – XAGUSD Regression Chart with Residual Spread)
Silver and gold prices are usually highly correlated. The price divergence between them sometimes creates pair trading opportunities. Bloomberg has a tool for easy pair trade analysis that creates a regression model and uses residual spreads of this model to catch these divergences, then uses residual spreads to backtest pair trade by buying one and selling the other one at the same time. According to the model created for the 2019-2024 period, residuals are currently in favor of gold too much right now, and it might be balanced in the coming months. This suggests that silver might perform better against gold in the near future.
