Will the Gold-to-Silver Ratio Fall Back to 50–70? The Fed's dovish pivot, easing trade tensions between major economies, and AI-driven optimism defined last week's risk asset markets.
The Federal Reserve cut interest rates as expected but cast doubt on future easing, triggering volatility in U.S. Treasuries, with yields posting their largest single-day swing since 2022. The dollar strengthened, pushing USD/JPY to 154. However, equities remained buoyed by AI euphoria, with major U.S. indices rising, while European and Asian markets mostly declined—except for Japan’s standout performance. Oil and commodities weakened, while gold extended its technical correction amid ETF outflows. Both the ECB and BOJ held rates steady.
The Fed lowered its policy rate by 25bps to 3.75%–4.0% and announced an end to QT (quantitative tightening) from December 1 to maintain liquidity. While these moves were anticipated, post-meeting remarks surprised markets. Chair Powell stated, "I’ve always said we don’t pre-set conclusions, but this time let me add—this [cut] is far from being a done deal."
The phrase "far from being a done deal" deviated from Powell’s usual tone, signaling deliberate emphasis on December rate-cut uncertainty. With inflation and growth trends potentially diverging from market expectations, Powell questioned the pace and magnitude of easing. Pre-meeting, markets had fully priced in a December cut, but bonds and rate futures swiftly repriced after his remarks.
Post-meeting, Dallas and Cleveland Fed presidents—non-voters this year but 2025 voters—voiced opposition to a December cut. Dissenting voter Kansas City Fed President Schmid also explained his stance. The Fed now appears deeply divided on policy outlook, with rare public disagreements over future cuts and the neutral rate.
U.S. growth remains robust at 3.9%, but job markets are slowing while inflation risks linger. Trump’s tariffs have had limited inflationary impact, though uncertainties persist. A looming government shutdown adds economic ambiguity. Policymakers’ neutral-rate estimates span 2.5%–4%, complicating consensus-building.
We still expect a December cut, with 2025’s voting rotation likely slowing cuts to quarterly. The neutral rate debate will intensify—we believe it may guide next year’s easing trajectory, with the White House arguing AI-driven productivity gains justify a structurally lower neutral rate.
Regardless of Powell’s near-term guidance, a new Fed chair (likely a Trump loyalist) could reshape policy post-transition. With midterms approaching, Trump is refocusing domestically, prioritizing fiscal expansion and monetary stimulus. The passage of the "Big and Beautiful" bill has automated fiscal swings, implying unprecedented Fed "guidance."
Our 2025 policy outlook hinges on two observations: (1) Rising borrowing costs for tech giants, reflected in widening corporate-Treasury spreads, signal bond-market caution toward massive capex; (2) Tightening liquidity, evidenced by record SRF usage since COVID, threatens market functioning, forcing the Fed to halt QT.
On silver: After a synchronized selloff, it decoupled from gold last week—rising as gold fell. A stronger dollar and receding geopolitical risks drove precious metals’ pullback. Japan’s politics and Fed rhetoric triggered leveraged exits. Silver’s 68% YTD surge warranted a technical correction.
Silver’s dual nature—financial and industrial—sets it apart. Its industrial demand shines in green energy transitions, with solar (10 tons/GW) and EVs (70M oz/year) driving growth. It’s also critical in semiconductors and solvents.
Financially, post-2008 QE normalized money-printing, inflating asset valuations—silver lagged until 2024. Anticipated Fed cuts may channel bank deposits into assets, benefiting silver.
Compared to gold, silver leans industrial over store-of-value—explaining central banks’ and retail investors’ gold bias, and gold ETFs’ dominance. This year’s silver rally reflects catch-up dynamics alongside booming EV demand.
The historic gold/silver ratio of 50–70 recently peaked near 100, triggering silver’s rebound. At 82 now, it remains elevated. Could it revert to 50–70? Possibly, but this metals rally is primarily financial—fueled by distrust in central banks, fiscal fears, and inflation hedging—favoring gold.
This week’s focus: (1) Post-summit trade talks between major economies; (2) The BOE’s likely unchanged policy meeting.
[The author is President and Chief Economist of Springwater (Hong Kong). Views are personal and do not represent institutional forecasts or investment advice.]