Is Silver the next Great Investment?
When I first wrote this in 2013, the price of silver had an average daily close of $23.79. On October 17, 2020 it is now $19.69. Since that time the national debt has soared by about $10 trillion with another stimulus package in the works. The total debt to GDP ratio has also soared from 102.39% in 2012 to 154.65% (10.17/20)
Silver has the highest electrical and thermal conductivity of any metal, very ductile and malleable. Silver has been used for making currency coins, extensively in electronic products, and as a catalyst for chemical reactions.
Long valued as a precious metal, silver continues to be used to make ornaments, jewelry, high-value tableware, and utensils such as silverware. Today, silver metal is used in electrical contacts/conductors, and in mirrors. Its compounds are used in photographic film, and dilute silver nitrate solutions/other silver compounds are used as disinfectants and microbiocides. Antibiotics have also supplanted many medical antimicrobial uses of silver.
The supply of silver is affected by its use and ultimate loss to landfills. Silver is consumed on a much larger scale than gold, with greater losses to landfills. This demand and loss give silver its potential value.
Theodore Butler, in "Silver For The New Era," lists causes that may lead to a quick rise in silver prices that include:
The Silver Short Squeeze: For more than 20 years far too many futures contracts have been shorting silver value. [Shorting is simply a bet that prices will fall]. There is not sufficient silver to fill all these contracts and once that becomes evident to the masses, speculators might be compelled to buy back their contracts driving silver prices way up.
Industry Panic: Silver has thousands of functions in industry and several of these applications do not have a substitute material readily available. As a result, when silver prices start to rise well above silver value today, industrial users will build up their inventories … leading to demand surges and higher silver prices.
No More Government Inventories: The U.S. and most countries have already depleted its silver stock [Removed silver content from coins].
Derivative based financial vehicles allow investors to purchase larger amounts of physical silver at exceedingly low prices bringing instability to markets. Derivatives are securities whose price depend upon or derive from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset.
Silver is used to hedge against inflation and consumed industrially. Silver is unsurpassed in terms of electrical conductivity resulting in tens of thousands of electronic and industrial applications presently being used for this metal. Silvers excellent reflective and anti-bacterial properties also make it a favorite metal of other types of applications. However, the amounts of silver used per application are so minimal, that it becomes next to impossible to recycle silver from any particular unit. Computers, cell phones, and CDs end up in landfills; their minute amounts of silver lost forever. Losses have been offset by new silver mines, improved mining techniques, and alternative metals/techniques. The use of silver has already plummeted in its use in both silverware and photography, both major users of silver.
No known government reserves of silver exist anymore in the world, even though gold is still stockpiled by central banks around the world.
The 'natural ratio' between silver and gold in the earth is 12:1. The monetary ratio has historically been around 16:1 (silver:gold, in ounces). However, you would have to go back several decades to come up with that figure. In fact, the ratio between silver and gold since 2001 has been 45:1 to 62:1, nowhere near the 16:1. Supply has stayed its natural ratio (12:1) leaving nothing to justify this price disparity. If the ratio of price of silver to gold was its historical rate, when gold was at $1,000, silver would be $160. In fact is that in 2010, when the price of gold was $1,224, silver was just $20 (61.2:1).
Over the last 11 years, the ratio of silver to gold demand has ranged from 6:67:1 to 7.86:1. This silver demand is noticeably greater than the natural ratio of 12:1, and makes demand capable of outpacing supply. If so, the price of silver would increase. One must pause to weigh this period (2001 - 2012) to that of history, and consider the economic and social strife of this period to that of the past. The debt to GDP of countries around the world is incredibly high, Greece remains in continual financial turmoil, and the U.S. is struggling on every front. The U.S. federal reserve is printing an unprecedented amount of cash and the national debt will exceed $17 trillion by the end of 2013. If there is any driver pushing the price of precious metals, its the uncertainty of paper currency holding value, the low return on cash savings, and the ongoing inflation numbers. High unemployment, gas prices, and food prices only feed the turn to precious metals. Silver is more affordable than gold and as gold moves, silver moves similarly.
The statistical data for the last decade shows a close correlation between silver and gold on many levels (supply, demand, and price). There is little evidence to suggest that this relationship has changed or will change rapidly. The price of silver is more affordable than gold, and given its numerous uses in industry, offers great potential to any investment portfolio.
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