Silver prices are significantly lower than gold. For many investors the lower pricing makes it much easier to purchase. This affordability of silver makes it the “common man’s gold”. Silver is considered by many experts to be affordable and undervalued. As a result, silver is a very attractive alternative asset class to traditional portfolios of stocks and bonds. Silver, like gold, has no counter-party risk. It is not someone else’s liability. There is also a massive amount of industrial usages for silver. So silver is not just a monetary metal, but an industrial metal as well.
Silver in various amounts
Demand for silver is diverse because it is not only a precious metal but an industrial one as well. The precious metal is commonly associated with jewelry, flatware and coins, yet over half of all silver available every year is used industrially. Silver is used in virtually all things electronic, from cars, computers, photovoltaic power systems (solar usages) to medical usages such as wound dressings and antibiotic coatings. According to a report from Thomson Reuters GFMS for the D.C.-based Silver Institute: “A global recovery of the auto market and a continued rebound in housing and construction will lift industrial demand for silver to a record 511 million ounces by 2014.”
New usages for silver are discovered all of the time, and the small amounts used in most industry applications make its price inelastic. As an example, if the price of silver quadrupled, it would still be used in cellphone production. What’s more, since most applications use very little, it is generally not economical to recycle. It is simple disposed of and disappears. Simply put, the demand for silver is constantly growing, making an investment in silver relatively stable going forward.
Below are some of the latest available statistics regarding silver supply and demand.
World Silver Supply and Demand (million ounces)
(totals may not add due to rounding)
Net Government Sales
Old Silver Scrap
Implied Net Disinvestment
Coins & Medals
Implied Net Investment
It should be noted that a very significant proportion of mine supply is a by-product of base metal production, as there are remarkably few pure silver mines in the world. Since the total above-ground silver supplied is destined for industrial usage (much of which is not recycled), this has resulted in an ever-diminishing above-ground supply. Since the 1950s, nearly 90 per cent of the stockpile has disappeared, demonstrating silver’s chronic supply-demand imbalance.
One should also consider the size of the silver market. Silver’s overall market size is very small when compared to the gold market, which in itself is relatively small. In fact, silver is more rare than gold. Currently there are approximately one billion silver ounces above ground, compared to five billion ounces of gold. In addition, approximately 75 per cent of all silver supply is used for industrial purposes, while the vast proportion of gold is available for investment demand. So if investment demand were to rise for silver, it could mean that the price could climb significantly faster than gold.
There are numerous debates about the silver/gold ratio. The historic ratio was 16:1.
Given historical ratios, the silver/gold ratio today is around 58:1. This is nowhere near the 19:9 range as suggested historically and based on supply. By comparing the current high-ratio versus the historic norm, one could easily conclude that silver is extremely undervalued and should be favoured over buying gold, assuming a reversion to the mean.
Silver as Currency
Historically both gold and silver have maintained intrinsic value and value as a currency as well. Both precious metals have been part of monetary systems throughout history. Today, the global financial system functions around fiat currencies (money by decree) that have a long track record of reverting to their intrinsic value of zero. It seems understandable that investors around the globe who recognize the apparent risks associated with fiat currencies would want to own physical bullion.
Consider the tremendous upside potential for silver as an investment based on the factors outlined. The current price affordability of silver, along with the diminishing supply of strong demand and small market size, make it one of the most undervalued assets in recent history for portfolio diversification and wealth protection.
Request an investor package and learn more about the importance of having silver as part of your wealth portfolio.
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