Oct 1, 2012
Last week we took some time to jot down all the reasons we could think of as to why to buy gold. So it seems only fair that we should give “poor mans gold” the same treatment and so today we look at the question – “Why buy silver?”
First up a number of the reasons we mentioned last week to buy gold also hold true as to why to buy silver. These include:
- Global Markets in general are still as risky as ever.
- Geopolitical risk is still very high.
- Global (co-ordinated?) Central Bank policy of easy money.
- Real interest rates are negative.
- AAA rated bonds are at record lows.
- Mine supply is relatively flat (scrap supply is tiny). And unlike gold much of silver supply comes as a by-product to other industrial metals such as copper and zinc so during economic slowdowns supply can diminish.
- To remove some of your wealth from the banking system.
- Physical Silver also has no counterparty risk.
- Protection from devaluation
- Every fiat (government decreed) currency has eventually gone to zero throughout history.
- Silver has also been used as money for millennia – like gold it is a store of value, unit of account and medium of exchange. On this last point, if things really go pear shaped then silver’s smaller value per unit of weight means it would be better suited to small everyday purchases.
(For a fuller explanation of each point check out the Why Buy Gold? article)
So Why Buy Silver Specifically?
• Silver is cheap compared to gold – First up the fact that silver is poor mans gold is enough of a reason for many people who view gold as too expensive for them. So even those with limited savings and limited spare cash-flow can still buy some silver regularly. (Of course you can buy smaller denominations of gold to make up for this but you’ll usually pay a higher premium above the spot price for the privilege).
• Silver is still in a stealth bull market – Silver is still off the radar of the average person in the street. From personal experience the average person who doesn’t buy precious metals we talk to may know that gold has been rising in price in recent years but they are very surprised when we tell them silver has doubled in price over the past 4 years. And unlike gold they have no idea what it sells for an ounce. So silver bull market is less mature than gold and still in the stealth phase where it rises without too many noticing.
• The silver market is tiny – Estimates are that the above ground silver inventory is only about 1 billion ounces. So at today’s prices would total only US$35 billion, so it wouldn’t take too many billionaires getting on board to dramatically affect this supply and therefore the price.
• Growing Industrial demand – Silver is the most widely used commodity next to oil. It has over 10,000 industrial uses. Besides electronics and solar energy production, it’s medical uses are also growing due to it’s anti-microbial and anti-bacterial properties. There is no economically viable substitute for silver in many industrial uses so manufacturers have to accept any price rise. But it’s price is low enough for the amounts used industrially so that even a doubling or tripling of the price would not significantly affect the end price of produced goods such as consumer electronics.
However this greater industrial demand is a doubled edged sword as this makes silver even more volatile than gold. It reacts even more to changes in the global economy.
• Silver is being used up – There is also the argument that as silver has many more industrial uses than gold that it is being used up whereas pretty much all the above ground gold ever mined still exists today. So the theory being that the silver supply is steadily diminishing versus the gold supply which slowly rises every year (albeit at the moment not enough to keep up with increasing gold demand but we digress and that’s another story). Estimates have been made that 95% of the gold ever mined still exists where 95% of the silver mined has been used up.
• Investment demand is growing – Evidenced by:
India’s silver imports have been increasing – In fact the Bombay Bullion Association predicts india will import 5000 tonnes of silver this year alone (that’s just over 160 million ounces!)
China has become a net importer of silver from a net exporter – China is the world’s 3rd largest silver producer behind Mexico and Peru, but in the past couple of years China has actually started importing silver on top of what it produces.
Silver – More Upside Than Gold?
So with these factors in its favour it’s not too surprising that many people believe Silver has potentially much more upside than gold – This is shown by a number of measures such as:
• Silver still to reach previous highs – Silver is the only commodity still cheaper than 32 years ago and still to make a new nominal high. Gold has well and truly surpassed its nominal high from 1980 of US$850 whereas the price of silver is still someway off its 1980 high of US$49.50 when the Hunt brothers had basically cornered the silver market. Some would argue that these prices were “bubble-like” and not fair comparisons. However the likelihood is that gold and silver will eventually reach bubble prices again in this bull cycle. A general rule is prices usually make extremes in either direction at the start and end of a cycle.
• Silver has even further to reach inflation adjusted highs – Gold has to rise to US$2638 to reach its inflation adjusted 1980 high of US$850. Silver has even further to go needing to reach US$122 to match it’s inflation adjusted 1980 high of US$49.50. About 4 times higher than now.
However these numbers are using the very fudged government CPI figures that have been tweaked many times over the past decade or so and with adjustments and substitutions definitely under report inflation. Using shadow government statistics numbers we’d arrive at something closer to US$9397 for gold and US$434.71 for silver.
Charts care of Sharelynx
• The gold silver ratio is currently way above long term historical norms - This ratio is simply the amount of ounces of silver you can buy with one ounce of gold. Currently it stands at 51:1. In the last 25 years it’s been as high as 100:1 and as low as 38:1. The long term ratio (we’re talking hundreds of years here) is about 16:1 – similar to estimates of the ratio of silver to gold in the ground. At the end of the last bull market in precious metals the ratio reached 16. If it was to reach 16 again silver would have to rise significantly from here comparatively to gold. Even to reach the higher level of 30 would still be a large increase in the price of silver.
Gold/Silver Ratio Chart
So that’s quite a list of reasons as to why to buy silver right now. If history even comes close to repeating then there is a fair bit of upside left in silver or rather at the rate central banks are creating paper currency, a fair bit of downside to go in all of them. Like gold, buying physical silver will not only protect your purchasing power from steady erosion via currency debasement, but also protect you with it’s lack of counterparty risk from the likes of banking default and financial system collapse.
If you can think of any other reasons as to why to buy silver, then please share them with us and other readers by leaving a comment below.
Or if you’d like a quote to buy silver bullion today then visit our order page at the link below: