An Ounce of Silver Costs More Than a Barrel of Oil. That’s Not Normal.

Silver has more than doubled this year, while oil prices have slid nearly 20%. (Dreamstime)

Key Points

• Silver prices have more than doubled this year to about $76 per ounce, while oil prices have slid nearly 20% to $58 per barrel.
• The current oil-to-silver ratio is approximately 0.8, significantly below the historical average of 3.8 since 1975.
• Experts suggest silver may be in a speculative bubble, though some analysts believe its rally could continue due to monetary uncertainty.

Want another sign that the recent surge in silver prices may be a speculative bubble? Just look at the slumping oil market.

A barrel of crude oil is hovering around $58 while one ounce of silver costs about $76, not far from an all-time high. Silver has more than doubled this year, while oil prices have slid nearly 20%. So the oil-to-silver ratio is only about 0.8. In other words, it costs about 0.8 ounces of silver to buy one barrel of oil. That is, needless to say, not normal.

According to a report from DataTrek Research on Tuesday, the only time prior to now that an ounce of silver cost as much as a barrel of oil was in January 1980, when the Hunt brothers famously cornered the market on the metal and briefly pushed prices to a then-record high of nearly $50 an ounce.

Silver prices are typically much lower than oil. DataTrek Research co-founder Nicholas Colas said in Tuesday’s report that the average oil-to-silver ratio since 1975 is 3.8. So a “normal” price for silver with oil costing $58 a barrel should be closer to $15 an ounce.

Or one could argue (but few would) that for silver prices at their current level to be fairly valued, oil prices would need to rise to 3.8 times the price of silver, or nearly $290 a barrel. Either way, something’s got to give.

“The oil/silver price ratio points to silver being in a speculative bubble and/or oil being excessively out of favor,” Colas wrote, adding that silver prices are likely the more distorted of the two.

“Silver is not a solid long-term investment at current prices. If you are trading it, we suggest keeping position sizes on the smaller side to take advantage of near-term volatility,” Colas wrote.

Still, other experts point out that silver’s explosive rally, while historically unusual given weak crude prices, could continue. Analysts at research firm SentimenTrader noted in a report Friday that silver is “benefiting from uncertainty in the global monetary system and expectations of lower real rates.” That’s a factor that has helped propel the price of gold to near record highs as well.

Katie Stockton, a founder and managing partner at Fairlead Strategies, argues that silver still looks attractive from a technical standpoint as well. “Momentum is positive across timeframes, and there are no long-term signs of upside exhaustion,” she wrote in a recent report, adding that “relative to gold, silver is on the verge of confirming a major breakout, implying continued outperformance next year.”

But there is no denying that silver prices, now up nearly 160% this year, look stretched, especially when compared to other commodities like oil as well as metals such as gold and copper.

“The silver rally looks too rapid and resembles a bubble,” said Alex Kuptsikevich, chief market analyst with FxPro, a commodities brokerage firm, in a report Tuesday.

The problem, though, is that it may be impossible to pinpoint the exact top. Predicting when a bubble is finally about to burst could be a fool’s errand. Kuptsikevich conceded that silver prices are still far from their inflation-adjusted record high from 1980 of about $200 an ounce.

And DataTrek’s Colas noted that silver could have more room to run in the short term. “Silver has the habit of becoming a hot ticket once every 10 – 20 years. During those periods, it is very hard to call a definitive top since investor enthusiasm can remain elevated,” he said.

So unless you’re an investor willing to trade in and out of silver, it might be best to stay on the sidelines.

Write to Paul R. La Monica at paul.lamonica@barrons.com