Silver is a Commodity and a Monetary Metal
The word ‘pound,’ as in British pound, once meant a pound weight of sterling silver or silver that is nearly pure silver (92.5%).
Like gold, silver is – or was – a monetary metal. So its attraction is clear in these times of massive monetary experiments and currency debasement.
Isaac Newton, one of the greatest scientists of all time, was appointed Master of the Royal Mint and quickly monetised silver and set the ratio at 15.5 early in the 18th century and this held until 1873.
The “major monetary metal throughout history is silver, not gold,” said economist Milton Friedman.
In more than 90 different languages the words silver and money are one and the same: shekel in Hebrew, argent in French, plata in Spanish and many others.
Silver is a precious metal, and like gold, it has an intrinsic value. Silver is widely perceived to be both a commodity and a form of money, and it has been used as a medium of exchange for thousands of years due to its inherent value.
Silver also has number of unique characteristics, such as malleability, thermal and electric conductivity, and a resistance to corrosion, which allow it to be used in many important industrial, telecommunications, medical and energy technologies. This industrial demand underpins stable global silver demand.
A lot of silver is used in small quantities in devices such as mobile phones can be less economical to recycle as opposed to gold. So less silver is recycled, thereby creating the need for more primary mine supply. Overall, silver industrial and investment demand continues to increase significantly while meanwhile supply is falling.
Furthermore, some of silver’s demand comes from its use in jewellery and collectibles.
Silver is an Investment Asset
Like gold, silver is part of the precious metals asset class, and can act as a hedge against inflation and a portfolio diversification technique to mitigate geo-political, monetary and systemic risks. Like gold, silver is a store of value and has retained its purchasing power over long periods of time.
It has been shown in numerous academic studies including by the highly respected portfolio and asset allocation experts, Ibbotson and Associates, in a June 2005 study, ‘Portfolio Diversification with Gold, Silver and Platinum’, how silver, and indeed precious metals, are the only one of the seven asset classes with a negative average correlation to the other asset classes. It is also worth noting that the authors showed that, excluding cash, precious metals are the only asset class with a positive correlation coefficient with inflation, which is further evidence that precious metals act as a hedge not just against macroeconomic and systemic risk but also against the long term threat of inflation.
The Ibbotson study wrote that “The three metals were chosen because gold and silver are often viewed as a safe harbor in times of crisis. Conversely, during economic expansion demand for silver and platinum is thought to increase.”
According to Ibbotson Associates, precious metals are the most positively correlated asset class to inflation. From a strategic point of view, Ibbotson determined that portfolios could reduce risks and improve returns with a 7-15% allocation to gold, silver and platinum.
Affordability of Silver
Silver is more affordable than gold for UK buyers as they can accumulate more silver than gold pound for pound. Also, silver is more affordable as buyers can dollar or pound cost average into a position through regular small purchases. Psychologically, this makes the purchase of silver more achievable for small investors since £1,000 can buy up to 80 ounces of silver but just over one ounce of gold.
The gold-to-silver ratio is a widely used metric for valuing silver in terms of gold. The ratio is currently above 60 and is near a multi-year high level. Historically, the long-term historical trend of the ratio has been the region of 15 to 1.
In fact, during the gold and silver standards of the 1700s – 1900s, money was defined in terms of specific weights of gold and silver and gold was specified in terms of silver in a ratio of between 15-16 to 1. Furthermore, global silver reserves in the ground as a ratio to global gold reserves in the ground is in the region of 10:1
The current gold to silver ratio of over 60:1 would indicate that silver is significantly undervalued relative to gold. So if you believe that this ratio will converge towards lower historical levels, then a purchase of silver could get a buyer “more bang for their buck” and better returns.
Physical Market is Small
The world’s physical silver market is far smaller than the global ‘paper’ silver market that trades through futures contracts primarily on the COMEX futures exchange in New York.
There has been a lot of focus on the outstanding “concentrated short positions” on the COMEX, whereby a few banks maintain huge positions of paper futures contracts betting against a rise in the silver price. If U.S. regulators finally change their rules on the size of position limits, this could allow the market to go back to a more natural balance. There is also the potential for a short squeeze that propels prices significantly higher.
Minimal Risk of Government Confiscation
Investors worried about the confiscation of gold, as happened in the US in the1930s do not need to worry as much about the confiscation silver, since there is no historical precedent for silver confiscation.
The Silver Price Increases more than Gold in a Bull Market
The silver price is historically more volatile than the gold price, in that it can move more rapidly. However, if you expect a bull market in precious metals, in other words, if your view is that the gold and silver prices will rise, and based on historic performance, the silver price would be expected to rise by a higher percentage than the gold price.
In the 1970s bull markets of gold and silver, the silver price rose 3,800%, compared to 2,500% for gold. Silver is likely to outperform gold in the coming years.