Gold/Silver Ratio & Relative Valuation

In times of economic uncertainty, gold has long been regarded as a reliable store of value. However, in recent years, silver has increasingly emerged as an attractive alternative for investors seeking both diversification and additional upside.

A widely used tool to gauge the relative value between these two metals is the Gold/Silver Ratio (GSR), which measures the number of ounces of silver required to purchase one ounce of gold. Historically, this ratio has proven to be mean-reverting, consistently cycling back toward its long-term average over time.

Using daily LBMA* prices starting from May 9, 1995, the GSR has averaged ~67, with a standard deviation of ~12.5. In May 2025, the ratio surged to ~104, nearly +3 SD above its historical mean, and has since moderated to ~91.6 (~2 SD) as of July 1st, 2025.

From May to July, as the ratio eased from 104 to ~91.6, silver prices climbed from $32.43 to ~$36. Despite this move, the ratio remains elevated, indicating that silver is still relatively undervalued versus gold and has further scope to appreciate as the GSR continues to mean-revert toward its long-term average of ~67.

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Implied Silver Price from GSR Mean Reversion

Given the historical average GSR of ~67 and factoring in widely referenced forecasts for gold to rise to ~$3,700/oz over the coming cycle (Goldman Sachs, June 2025), a complete mean reversion of the ratio would imply a Silver price ($3,700/67) ≈ $55/oz.

This represents a potential ~52% upside from current silver levels around $36, purely on a relative valuation basis.

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Forward Return Analysis Based on GSR Extremes

1-Year Forward Returns

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When the GSR has historically remained above +2 SD (i.e. >= ~92), silver delivered a median 1-year forward return of ~+57%, while gold returned ~+6.8%, with 93% of instances seeing silver outperform gold.

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3-Year Forward Returns

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Over three years, at GSR greater than 92, silver maintained its lead with a median return of ~+13% versus gold at ~+5.2%, outperforming gold in ~99% of similar historical periods.

This suggests the tactical opportunity for silver extends over the next 12–36 months as the ratio normalizes.

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Market Fundamentals • Demand, Supply & Industrial Drivers

The silver market continues to be underpinned by a compelling mix of persistent supply shortfalls and accelerating industrial demand across key growth sectors.

Supply Dynamics

The global silver market is on track to register its fifth consecutive annual deficit in 2025, with a projected shortfall of ~117–149 million ounces (Moz), following a deficit of approximately 149 Moz in 2024. Mine supply has remained relatively constrained, unable to keep pace with the steady rise in industrial consumption.

Industrial Demand & Secular Growth Drivers

Industrial usage reached a record ~680.5 Moz in 2024, driven by structural demand trends that are expected to continue:

• Solar Photovoltaic (PV) Installations: Silver demand from the solar sector grew by ~20% year-over-year in 2024 to reach ~232 Moz, now representing ~19% of total silver demand. With global solar capacity expanding at an estimated ~26% compound annual growth rate (CAGR), the PV industry is projected to add thousands of gigawatts over the next decade, further boosting silver intensity.
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• Electric Vehicles (EVs) & Battery Technologies: 
EVs currently account for nearly 3% of global silver demand, with silver loadings per EV approximately 50% higher than in traditional internal combustion engine (ICE) vehicles. As global EV adoption accelerates, this segment is expected to become an increasingly important driver of silver consumption.
• AI-Driven Electronics & 5G Infrastructure:
Over 10% of industrial silver demand is tied to electronics and semiconductor applications, with forecasts suggesting this could climb to 15–20% by 2027. The buildout of AI data centres, advanced chip manufacturing, and the continued global rollout of 5G networks are all adding incremental demand for silver, prized for its unmatched electrical conductivity.

Alongside these strong industrial underpinnings, silver also continues to attract robust investment interest, with ETF inflows remaining resilient in early 2025. This multi-pronged demand backdrop reinforces the market’s structural tightness and supports a constructive price outlook.

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Low Correlation with Equities

Silver has historically exhibited a low correlation of ~5% with the Nifty 500, highlighting its value as an effective diversifier within equity-heavy portfolios.

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Conclusion & Tactical Call

As of July 2025, with the GSR at ~91.6 (~2 SD above its long-term average of ~67), the combination of this historically mean-reverting relationship, robust underlying fundamentals, and very low correlation to equities highlights silver’s attractiveness as a tactical allocation.

Based on historical precedents, silver could continue to outperform over the next 12–36 months, with relative valuations suggesting prices may trend toward ~$55/oz if the ratio normalises to its long-term mean alongside forecasted gold levels.

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Risks

Silver prices have historically been highly volatile, with a long-term annualized standard deviation of around 25%. This means silver is prone to sharper swings and deeper drawdowns than most asset classes. While the current setup supports a tactical overweight, positions should be sized to reflect this higher risk and monitored closely as the GSR normalizes.

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Investment Vehicles

Mutual fund-based Silver ETF Fund of Funds remain the most accessible and widely adopted routes for investors seeking silver exposure. Although Silver ETF are available, Silver FOF can be redeemed any day and provide better liquidity.

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