The divergence has pushed the gold-silver ratio higher, indicating that investors now need more ounces of silver to buy an ounce of gold. Ponmudi expects this ratio to rise further, suggesting that silver could continue to lag the yellow metal.
Why is the gold-silver ratio important?
The gold-silver ratio measures how many ounces of silver are required to purchase one ounce of gold. Investors use it to compare the relative performance and valuation of the two precious metals.
When the ratio rises, gold is outperforming silver. A falling ratio, by contrast, indicates that silver is gaining ground relative to gold.
The ratio can be influenced by several factors, including investment demand, industrial activity, interest-rate expectations and broader economic conditions. Silver has a dual role as both a precious metal and an industrial commodity, making its price more sensitive to changes in industrial demand and economic sentiment.
The recent correction has also challenged the argument that robust industrial demand would provide a strong floor for silver prices. According to Ponmudi, the metal’s steep decline has punctured the earlier narrative that its industrial demand was inelastic.
Gold's long-term inflation-adjusted returns
Historical returns provide another reason for investors to reassess the relative appeal of the two metals.
According to Ponmudi, gold delivered an inflation-adjusted annual return of 2.5% over nearly 75 years from 1950, compared with 1.4% for silver.
The difference suggests that gold has historically preserved and grown purchasing power more effectively over long holding periods. Ponmudi expects this inflation-protection characteristic to support gold’s relative resilience in the coming months.
However, historical returns do not guarantee future performance. Both metals can experience substantial price swings, and their relative returns depend on the economic and market conditions prevailing during an investment period.
What could keep silver under pressure?
Silver's industrial exposure can make it more vulnerable when investors reassess economic growth prospects or reduce risk across commodity markets. Its higher volatility can also magnify price movements following a strong rally.
The recent decline illustrates this risk: despite the argument that industrial demand would support prices, silver has fallen substantially from its peak.
Gold, meanwhile, has a more established role as a store of value and a portfolio hedge during periods of uncertainty. This distinction could help it outperform silver if investors continue to favour relative stability over exposure to industrial demand.
The gold-silver ratio has moved above its long-term median, according to Ponmudi. Although this might ordinarily prompt investors to consider whether silver has become relatively inexpensive, he expects the ratio to rise further given his cautious outlook for silver.
What should investors watch?
The direction of the gold-silver ratio will be an important indicator of whether silver is beginning to recover relative to gold or continuing to underperform.
Investors should also monitor industrial demand, global growth expectations, interest-rate developments and broader investment flows into precious metals.
A sharp correction alone does not establish that silver has reached a bottom. If gold continues to demonstrate greater resilience while silver remains vulnerable to selling pressure, the relative performance gap could widen further.
For investors choosing between the two metals, Ponmudi’s assessment highlights the importance of looking beyond recent price declines and considering long-term returns, volatility and the role each metal plays in a portfolio.
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