For thousands of years silver has been revered as a form of money. The silver standard ended years ago and while that may have concluded, silver is still highly regarded as a store of wealth.
Silver as an Investment
Silver, a precious metal, can be a good store of wealth; it may be used as a hedge against inflation, deflation or devaluation. However, silver is much more affordable than the other precious metals. In mid-2016 silver was trading around $20 per ounce, compared to gold that was above $1,300 per ounce. This price makes silver accessible by a wide variety of investors.
For this reason this metal is often referred to as “poor mans gold,” as many investors may purchase silver for the same reasons that they would buy gold, but they can do so at a more affordable price.
There are certain things to consider; however, for those looking at buying into silver as pure speculation. While silver is in demand as a pure investment vehicle, in contrast to say gold, the commodity has a very high physical demand component and for this reason the metal is a bit of a chameleon; although it is a precious metal it can also act as an industrial metal, which means that in certain economic circumstances silver’s price could actually retreat when gold would appreciate. For example, during an economic slowdown investors may shun silver due to its prevalent use in industry, sending the price lower while gold could appreciate on safe haven demand.
Another thing for investors to consider is that the silver market is a lot less liquid than the gold market, at this can result in bigger bid-ask spreads on assets and more difficultly buying or selling the commodity at the desired price, and can also contribute to price volatility.
Supply and Demand
Like most commodities, the price of silver is driven by speculation, supply and demand. In terms of speculative demand, this is by investors who purchase physical and “paper” silver to meet their investment needs.
Over the years, as silver has attracted more investors, therefore, more investment vehicles have been created. Silver investors have a plethora of options to choose from, including coins, barns, ETFs, mining stocks, and certificates; to name a few. The largest component of silver demand is for industrial applications. In 2015 it accounted for 50% of global silver demand. Next is jewelry and finally investments.
Silver has a great amount of physical uses including photographic development (although this use is in decline due to the decrease in film photography), electrical appliances, photovoltaics (solar panels), medical applications, and military applications. There is currently a lot of ongoing research into expanding the use of silver by industry. This is important because technological advances can completely change the supply-demand fundamentals of a commodity, with new applications for silver leading the way for a new market balance.
Silver is unique when compared to the other industrial-precious metal chameleons, platinum and palladium, in that its price is low enough that use by industry is affordable.
The next biggest use of silver is jewelry. Both industrial and jewelry demand has a great deal of economic sensitivity, and with these two uses, which are both greater than the commodity’s investment demand, you can see how the silver is much more sensitive to the health of the economy compared to gold.
Silver supply comes from both mining new reserves and recycling of jewelry and other goods of which silver was a component. Still, new silver supply from mines is needed to meet overall increases in demand, and silver mining is slowing down. The global physical silver market is expected to record a 1,005 mt deficit in 2016, a direct result of tightening supply. The expected fall in mine production followed 10 years of production growth.
A discussion of silver is not complete without talking about the gold-silver ratio. While years ago the gold-silver ratio used to be fixed by governments, it is now allowed to fluctuate freely.
The Gold to Silver Ratio is the amount of silver ounces it takes to purchase one ounce of gold, and this ratio is used to analyze both gold and silver prices. When the Gold to Silver Ratio is high, according to proponents of the ratio that means that silver is a good buy and it is advisable to sell gold and buy silver. When the gold-silver ratio was fixed, it was fixed at 15:1. While there are differing opinions on what the proper gold-to-silver ratio should be, some cite the fact that he US Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, therefore the ratio should be about 17.5. Prior to the 1900s, when many countries were using gold and silver backed currencies the ratio averaged 16 – and therefore others think this is the most accurate measure of where the ratio should fall. Whatever the case, it is important to note that this is just an analytical tool, and should not be relied upon too heavily.