Why You Should Buy Silver
We're very bullish in precious metals in general, but especially with silver. In this article, we aim to show why silver has such strong upside potential. Basically, silver's supply could not keep up with increasing demand for it, both in industry and as an investment. And whenever supply could not keep up, we can expect prices to explode to the upside.
By the end of this article, you will have understood why it is necessary for you to invest in silver. In brief, we examine the following:
- Demand for silver in industry;
- Demand for silver as medium of exchange;
- The shrinking silver/gold ratio, and what this means for the silver price;
- Protecting yourself from inflation through silver;
- Silver's volatility, and how to take advantage of it; and
- The importance of owning physical silver.
Silver has been used in the making of tools and other goods since ancient times. And its use in modern industry won’t be going away anytime soon. There are those who look at the struggling economy as a reason to get out of industrial metals such as silver. But no matter how difficult the economic situation, the demand for essential products will have to remain, and silver will continue to be used in the manufacture of various goods.
Silver is an excellent conductor, reflector, and is strong while remaining malleable. These features and others make silver excellent for electronic products. It is also used in the field of medicine, and of course for silverware.
In 2011, 487 million ounces of silver were used in industry. This is just a little less than half of total demand for silver, of 1.04 billion ounces, for the year. Meanwhile, mine production was only at 762 million ounces, with the rest of supply (242 million ounces) mainly coming from scrap silver. It is quite clear that production of silver is quite restricted in comparison with its usage.
Silver As Money
Silver is usually considered as secondary to gold when it comes to being a medium of exchange or form of money. But silver might just very well surpass gold as the primary medium of exchange in the years to come, and we provide our reasons for this below.
Silver and gold have the same attributes that make them great for sound money. Supply remains rare, and precious metals couldn’t be printed out of thin air like bank notes, thus making for a steady purchasing power of each piece of metal.
The yearly average price of silver/oz. in Singapore Dollar 2003-2012
Total increase, 2003-2012: 346%
Silver and gold are also durable goods that can withstand high amounts of heat, and are not as prone to wear and tear when being constantly transferred from hand to hand. They do not decay as do other substances such as organic matter, including wood.
In the production of silver and gold coins and bars, the metals can be divided into any variety of sizes, without diminution in terms of quality. And lastly, the qualities of one unit of pure silver or gold are essentially the same as any other unit of silver or gold elsewhere, making them homogeneous in nature.
Together, these qualities, of rarity, durability, divisibility and homogeneity make precious metals, in particular silver and gold, ideal for exchange in an exchange economy. Without such money, people can only trade in barter, which makes for narrower options for traders, and disallows longer-term planning.
Silver was the original money used in Singapore 200 hundreds years ago. Back then, traders would use silver dollars, in particular, the Mexican dollar.
In 1837, it was the Indian silver rupee that was decreed as currency in Britain's Straits Settlements. In 1867, the Mexican silver dollar was once again considered legal tender. As with other countries during the 19th century and early 20th century, silver content was a prominent aspect of government coinage. But in 1949, silver coins circulating in Singapore were demonetised.
By the time Singapore adopted its very own currency in 1967, silver had no role in the manufacturing of coins. It is no wonder then that in spite of Singapore's political independence, and in spite of its monetary policies not being dependent on other countries, the Singapore dollar would depreciate in value, along with other currencies such as the US Dollar, the British Pound, and more recently, the Euro. Singapore's Monetary Authority accommodates constantly rising prices, even if this involves a falling value of the Singapore dollar relative to silver.
Undervalued to Gold
We also see something bullish about silver’s price relative to gold. Silver’s exchange rate to gold is much lower than usual in history, and if silver’s price goes up relative to that of gold, this will mean a huge jump in silver’s price.
Gold to silver price ratio, SGD, from 2003 to present (end of 2012)
The supply of total silver mined in relation to total gold mined in history, about 10 to 1, is not reflected in the price relation between the two. For much of 2011 and 2012, we can see that silver’s price is closer to 50 times less than gold’s. Furthermore, silver, when used in phones and mirrors and other products, tends not to be reused in comparison with gold, making for tighter supply. This is an additional reason to suppose that silver’s price is yet undervalued, and investors will come to realize this as the crisis drags on.
Because of this lack of reusability, existing silver stock is at its lowest since World War II. While there are about 2.2 billion ounces of gold above ground accounted for, silver's stock is only 1.2 billion ounces! This number is down from about 10 billion ounces back in the 1950s. During this time, the US held about 30% or 3 billion ounces of this, whereas today, the US no longer hold significant silver assets.
How is it that this metal, every bit as usable as medium of exchange and with its many industrial uses, is priced at about 50 times less than gold, when its actual supply is about half of gold? This is indicative of an undervaluation of silver; corrections in its price are already beginning.
But is it possible that silver is not undervalued, but that it is gold that is overvalued? If so, this would mean silver wouldn’t jump to the upside, and gold will plummet in price. However, if we are to go by purchasing power history of gold, the present price still trails the monetary debasement being implemented by governments worldwide. While total gold ever mined amounts to about US$8.5 billion (at a very conservative US$1,600/oz.), the monetary base in the US alone is already at $2.7 trillion. How much longer before investors, and governments, turn to precious metals for monetary stability, amid all the debt, deficits and inflation faced by countries?
The case for the opposite conclusion, that gold has yet to really explode, is more credible. And if gold’s prospects are good, silver’s prospects are more than likely better!
Invest in Silver
We have acknowledged silver’s use, both as money and in industry. Can we then invest in silver with confidence?
Investing in silver ensures that you have a stable form of money where your wealth is preserved. This is a good thing to have regardless of the state of the economy. But it is especially assuring to hold silver in times of great financial turmoil. We must also note that 'inflation' is best understood as an increase in the money supply, not an increase in prices. An increase in prices is the consequence of monetary inflation.
Financial crises happen when governments are unable to pay debts they have incurred. When strapped for cash, they resort to more and more inflation as means of debt payment, which results in a depreciation of currency. Sometimes, debt may get so out of hand that hyperinflation ensues. The most famous modern example is the one during the Weimar Republic of Germany in 1923, but a more recent hyperinflation happened in Zimbabwe.
During hyperinflation, people prioritize consumption over production. This is because the value of their bank notes diminishes in a matter of hours. When prices keep going up, it becomes more prudent to spend right away rather than wait for profits. The longer one waits, the purchasing power of one's bank notes becomes more insufficient to compensate for production costs.
Eventually, people will seek alternatives for the government-issued money, ‘real’ goods whose value is determined by people, and not official decree. Silver and gold, which could not be multiplied as easily as bank notes, are resorted to by economies beset by high inflation.
Regaining Monetary Status
Because supply for silver and gold can be expected to remain tight, there will be large demand for actual pieces of precious metals, and not just the certificates for these.
Some even blame the yearlong languishing of the silver price after its May 2011 high of over S$60/ounce, on the selling of silver futures to such a degree that the amount sold exceeds actual silver in existence by multiples. We will see below why such overselling could not continue, and why the silver price will continue rising.
Silver may turn out to be even more important than gold when it comes to trading for small day-by-day items. For example, one ounce of gold would be too much for even a week’s groceries, whereas, a couple of silver coins could be traded for them. We can expect this advantage of silver to give it a premium compared to less ‘liquid’ bars.
Something that makes investors uneasy, however, is the volatility in the price of silver. Although we have made the case for silver remaining in demand both as an investment and in industry, we can expect sudden jumps and drops, because prices would rely on market sentiment at any given time. During crises, buyers tend to react in a big way to an event perceived as bullish, and a day later, bearish events make for an opposite movement. These continuous ‘mood swings’ can be observed in the price changes of silver.
In the past few years, the silver price has shown a sharper increase than gold, but also a sharper drop from its 30-year peak of over S$60/oz. in May 2011. After this, prices fell to below S$30/oz. before rising steadily since. Clearly, people have taken advantage of buying at the bottom, before prices take off once more.
Buy Physical Silver
We must differentiate between two prices: the price of physical silver, and of paper silver. The former refers to the metal itself, which you can store in your residence or in a vault.
The latter refers not to actual silver, but to financial instruments that are based on the spot physical price. These may include exchange-traded funds (ETFs), futures, futures-based mutual funds, etc. where you do not actually own any actual silver. It has been calculated that the daily trading of silver is at 1.1 billion ounces, when in fact, actual supply could only amount to 1.3 million ounces per day. This means that paper silver exceeds actual silver by about 850 times! As investors try to redeem their shares in actual silver, or seek assurance in physical silver instead, supply inevitably tightens, sending silver prices through the roof. This means the end of paper silver, but a bright, bright future for physical silver.
This is the primary reason why you should buy the asset that can be delivered to you, and not its derivatives. An ETF will never serve as currency in the way silver does.
On its way to record-highs, we can expect sharp moves up and down for silver, as can be expected of an industrial metal sensitive to changes in the business environment. But its long-term upward trajectory should compensate for such volatility.
We have seen that demand for silver, as an industrial metal and as medium of exchange is rising, while supply continues to diminish. We have also seen how present supply conditions in relation to gold and to paper silver, indicate very strong upward potential for physical silver, especially considering the financial turmoil the world is experiencing.