Updated on 02/07/17
Silver is easy to buy, the coins are pretty, and it’s a heck of a lot cheaper than gold.
But is today’s spot price of silver a good one? That’s not easy to answer because silver doesn’t produce earnings or pay dividends that we can analyze. And the price is a lot more volatile than gold, making the question even trickier to answer.
Luckily, there are hints we can use to know if silver is overpriced or underpriced. How much is silver worth? Here are seven questions that can give us an answer…
One way to judge silver’s perceived value is whether the investing public is buying or selling.
The silver price has crashed an incredible 71% since its 2011 high. That certainly sounds like an investment that most of us would avoid.
Well, that’s not how investors have responded. In fact, sales of silver coins show that the reaction has been just the opposite.
Silver coin sales and the price of silver climbed together from 2008–2011. And here's what happened when silver began its decline in 2011. After the 2012 slump, sales have steadily climbed as the silver price sank. And 2015 has already set a new record!
Another piece of evidence is found in silver ETF physical holdings. Are investors buying or selling silver funds?
Again, we see that investors poured into silver ETFs even as the metal’s price fell. This mirrors the reaction of coin investors.
Clearly, investors see a need to own silver right now.
Answer: The record number of investors buying silver despite the price decline suggests they think silver is very undervalued.
The answer to this question is important due to silver’s heavy use in industry. Here’s a comparison of silver’s three major uses:
By far, the largest share of silver demand is industrial use, so it’s important to know if it’s increasing or decreasing. If it’s rising, that could signal the current price is undervalued; if it’s falling the price might be overvalued.
Silver is used across an incredibly broad and diverse number of industries and products—and they’re growing. The growth is so fast that new applications for silver are discovered almost daily.
➢ The Silver Institute projects that total industrial demand for silver will increase 5% through 2016—and outpace global GDP growth.
Silver is used in nearly every major sector of the economy. From electronics to biocides to batteries, you probably use a product every day that contains silver, whether or not you can see it or know it’s there.
The Silver Institute also projects that silver will end 2015 with a 57.7 million ounce deficit because of the relentless rise in industrial demand.
Answer: Industrial uses for silver are expanding and means that demand will remain robust. Silver’s economic worth continues to broaden and that trend will extend into the foreseeable future.
Would you rather buy an investment when the price is typically low or high? Many asset prices show cyclical or seasonal patterns that give investors the chance to buy when prices are low. Silver is one of those assets.
Here’s when silver’s high and low price periods tend to occur throughout the year. These seasonal patterns give us another clue about when to capture the best value in silver.
Historically, silver prices tend to be higher in the year’s first half due to demand from manufacturers. March and April are particularly strong months, while August is typically the weakest.
Of course, these are tendencies and not certainties. Other factors and events will influence silver’s price beyond seasonal trends.
Answer: Silver prices tend to be higher from January through May, and lower in the summer and fall. Investors will typically get better value in the second half of the year.
Another way to determine how much silver is worth is to look at what gold is doing.
Why? Because silver and gold prices tend to move together.
Since 1975, whatever direction gold goes, silver follows.
There are two more things this chart tells us…
Silver is far more volatile than gold. Its short- and long-term price swings can be extreme. Investors must accept silver’s explosive moves.
No one knows if the “bottom” is in for silver. But it has fallen so far that buying now carries less risk than at any point in the last five-plus years.
Answer: The silver price tends to follow gold’s. So watch the gold price to know what direction silver is likely headed.
A popular method to gauge how much silver is worth is to compare it to the gold price using the gold/silver ratio.
Calculating the ratio is easy: simply divide the price of gold by the price of silver. The higher the number, the more undervalued silver is compared to gold—and the lower the number, the more it’s overvalued.
Here’s the ratio since 2000:
You can see the ratio fell to nearly 30 during the big advance in precious metals in 2011. For reference, one of the lowest ratios ever recorded was 17 in January 1980—during the height of that bull market mania. Those numbers meant silver was overvalued at that time relative to gold.
Conversely, a ratio at 70 or above is rare and shows silver is significantly undervalued. It hit 80 three times this century, which signaled an extreme undervaluation. For further context, the gold/silver ratio averaged 47 during the twentieth century.
Keep in mind that as with all ratio analysis, we’re only looking at silver’s price relative to gold.
Answer: The gold/silver ratio is currently above average, indicating silver is undervalued compared to gold. A 70 or above reading implies steep undervaluation, while 40 and below means it is overvalued relative to gold.
When investors are excited about stocks or bonds or real estate, investment in silver drops off. Its share of global wealth falls and suggests that it is undervalued.
On the other hand, when the global community wants more silver, its share of global wealth rises and hints that silver might be overvalued.
Here’s the data since 1990.
In 2014, silver’s share of global wealth sat about midway between the 1990 and 2011 highs and the early 2000s lows. Keep in mind the silver price is lower in 2015 than 2014, meaning its share of global wealth is even lower than portrayed in the chart.
Answer: Based on this measure, silver was fairly valued at the end of 2014. Since silver’s share of global wealth continues to fall, the silver price is most likely undervalued.
Governments and other institutions hold inventories of silver. Those inventories fluctuate depending on their needs. Large or sudden changes in silver inventories can have profound effects on the silver price.
If inventories are dropping, it implies demand is high, making silver worth more. If inventories are rising—meaning demand is falling—silver is likely overvalued.
The US, India, and Mexico still hold some silver in government warehouses. Here’s a snapshot of what’s happened to those government inventories.
Since 1996, silver inventories from these three governments have fallen 73%.
Answer: Falling silver inventories suggest demand for silver is high and that silver is undervalued. Government inventories currently remain near record lows, which implies silver is highly undervalued.
You can combine all the valuation hints above and it wouldn’t equal this one...
Since silver isn’t a dividend-paying asset or an earnings-producing company, its value is largely based on its worth to your portfolio when things go haywire in the economy.
So the question to ask is…
What is silver worth to MY future?
Silver is a hard asset that has advantages most other investments don’t (except gold). Silver has…
No counterparty risk. If you hold physical silver, you don’t need another party to make good on a contract or promise. This is not the case with stocks and bonds and virtually every other investment.
Never been defaulted on. If you own physical silver, you have ZERO default risk. Again, not so for almost every other investment you make.
Never gone to zero. Ever. Not once in history. If you own silver, you can rest assured that it will always have value at any time in the future.
These advantages give you power. So when you ask how much is silver worth, ask yourself, what is this power worth to me?
The only scenario where the silver price could suffer is in a deflationary depression (something like the Great Depression). But keep in mind that central bankers will not sit idly by if something like this were to happen.
A depression would threaten the stability of the global banking system. The immediate reaction from central banks would be to institute highly inflationary policies—which is exactly the environment where silver soars.
So, if you don’t own silver, buy some now! If you don’t own a meaningful amount—enough to make a difference to your portfolio when things go sour—buy more now.
Answer: Only you can answer this question.
|Are investors buying or selling?||Despite the drop in price, US Mint sales of silver Eagles are at record levels, ETF holdings have risen, and mints have difficulty sourcing enough silver blanks to produce coins.|
|Are industrial uses growing or shrinking?||Industrial use is the biggest part of demand, and industry experts project that total industrial demand for silver will grow faster than global economies.|
|What is the season?||Silver prices tend to be high January through May, and low in the summer and fall (and thus the best time to buy).|
|What is gold doing?||Silver prices tend to move in the same direction as gold, but are more volatile. Watch gold for hints about silver.|
|What is the gold/silver ratio?||The average gold/silver ratio is 60, so a 70 reading or higher implies silver is deeply undervalued, while 40 or below means it is overvalued relative to gold.|
|What is silver’s share of global wealth?||Silver’s share of global wealth implies it is fairly undervalued in 2014 (the latest data available). The silver price has moved lower in 2015, implying it is now undervalued.|
|Are silver inventories rising or falling?||Government silver inventories have fallen 73% since 1996. Total inventories from all sources equal just 25% of one year’s supply, showing silver is undervalued.|
|What is silver worth to me?||Answer this question for yourself.|
The answers to most of these questions suggest that silver is undervalued, that buying it now is a low-risk investment, and that it could be highly profitable in the years ahead.
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