The price of Silver has surged by over 200% year-on-year, altering the gold/silver ratio. This change prompts contemplation on whether this rise indicates a market shift and if it is the right moment to sell.
The gold/silver ratio, which shows how many ounces of silver can be bought with one ounce of gold, has moved from a high point in April 2025 to a much lower level now, even though gold has increased by nearly a third.
Speculative Excess in Silver Market
The likelihood of silver being a new safe-haven asset is low. Instead, its growth may be attributed to increasing momentum as it catches up with gold, coinciding with retail engagement and rising industrial demand.
Given the 200% year-on-year price rise, we believe the silver market is showing signs of speculative excess. This rally seems driven by momentum and retail interest, not a fundamental change into a safe-haven asset. The risk of a sharp pullback in the coming weeks is now considerably high.
The gold/silver ratio has fallen from its high in April 2025 to an unusually low level around 40. Historically, the ratio has averaged closer to 60, and such low readings have often preceded periods where silver underperforms gold. A pairs trade, going long gold and short silver futures, could be positioned to profit from this ratio returning to its historical mean.
Market Dynamics and Technical Indicators
We are seeing signs of froth in the derivatives market, with call option volume on silver ETFs up over 300% in the last quarter. This suggests traders could consider buying put options to bet on a price decline with a defined risk. Selling out-of-the-money call spreads would be another way to express a bearish to neutral view, capitalizing on elevated implied volatility.
From a technical perspective, silver is extremely overbought, with the weekly Relative Strength Index (RSI) now above 85. We saw similar readings precede the major price corrections in the past, such as the one in 2011. This indicates that upside momentum may be exhausted, and traders should be wary of establishing new long positions.
While industrial demand for silver in solar and electric vehicle production is a solid long-term factor, it cannot justify the speed of this recent price move. The primary driver has been investment demand, which is notoriously fickle and can reverse quickly. We should watch for outflows from silver-backed ETFs as an early warning sign of a trend change.
