While gold and silver have shown a broadly similar price trajectory over the past thirty years, Bank of America analysts argue that their relationship is not consistently cointegrated, meaning a reliable mean-reverting trading strategy between the two is generally not viable.
"Gold and silver have followed broadly a similar trajectory over the past three decades, even if the main drivers of their performance might differ," BofA notes.
However, the bank’s analysis, which uses "rolling regressions on a five-year window of daily performance data," reveals that "only 20% of [the] time" the gold-silver pair demonstrates cointegration.
This scarcity of cointegration leads BofA to conclude that "the gold-silver pair never makes the cut" for their preferred spread value strategy.
Interestingly, BofA found that cointegration between gold and silver tends to appear during periods of heightened market turmoil and uncertainty.
These episodes are said to include the Asian market crisis in 1997, the Dot-com bubble in 2002, the runup to the Great Financial Crisis 2007-2008, and Dec 2015 – 2016.
"It is intuitive that both precious metals might play a role of safe haven during periods of market disruption, and during such times the cointegration test for the pair is indeed positive," BofA explains.
However, recent market disruptions, such as COVID, the Russia-Ukraine war, as well as the recent presidential elections, have not resulted in gold-silver cointegration, according to the bank.
BofA attributes this decoupling to the distinct factors driving demand for each metal. "The recent market turmoil did not induce gold-silver mean reversion," they state.
Specifically, BofA highlights the price-insensitive central bank buying as a primary driver of gold’s recent rally, driven by geopolitical concerns rather than traditional inflation or real yield factors.
Silver, on the other hand, is "harder to store and is driven instead by industrial demand."
In conclusion, while BofA remains bullish on gold, they advise against taking positions on gold-silver spreads, stating that "we see no evidence of mean reversion emerging in the gold-silver pair. In fact, the two metals have rarely been cointegrated, and their relationship has further decoupled recently.
