Gold bullion gets all the headlines when it comes to precious metals. Yet silver is just as precious as gold and shares many of its traits. It’s a store of value, an inflation hedge, and protection against economic and financial system crises—just like gold.
Also like gold, the silver price has crashed (check the silver price per ounce). It fell nearly 70% from its May 2011 high.
But silver has a unique set of features that make it a different investment than gold:
Its elemental properties give it greater industrial applications
Its use as coined money throughout history far exceeds gold’s
It has its own supply and demand dynamics that differ from gold
Here's some essential advice on investing in silver bullion (silver coins and silver bars)—plus a comparison between silver and gold, which will help you evaluate the current silver price, spot bullish signals, and know when it’s a good time to buy silver.
For investors, there are two critical differences between silver and gold:
Roughly half of all silver is used in various industrial applications versus 12% for gold. Everything from biocides and electronics to solar panels and batteries, silver saturates our modern life.
Visited a doctor or admitted to a hospital lately? Then you’ve been a direct recipient of one or more of the medical benefits of silver. From a simple bandage to operating-room equipment, silver is literally a lifesaving metal.
Silver is everywhere, even if you don’t see it.
And silver’s industrial use is growing:
New applications for silver are discovered almost daily! Sounds like late-night infomercial hype, but it’s true.
The solar industry has grown dramatically worldwide—and it uses a lot of silver. According to BSW-Solar Association, photovoltaic capacity will quadruple by 2020. The US Solar Energy Industries Association says, “Eventually solar will become so large that there will be consequences everywhere.”
And the Silver Institute projects that industrial demand for silver will outpace global GDP growth. The need for silver is BIG!
And here’s the kicker: unlike gold, most industrial silver is consumed or destroyed after use. That’s because it’s just not economic to recover a tiny flake of silver from millions of cellphones, casino chips, and batteries. So the quantity of supply that returns to the market via recycling is limited.
The silver market is heavily dependent on industrial use. This is not the case for gold.
The bullish case is that continued growth in industrial uses for silver will keep demand strong. And millions of ounces cannot be reused.
The risk is that if global economies enter a recession or depression, industrial needs will decline—and so would demand.
The total annual supply for silver is around 970 million ounces. At $15 per ounce, the “market cap” of the industry is $14.5 billion. Sounds like a lot of money...
— but it’s actually not. Each of these popular companies is valued higher than the entire annual supply of silver! Even Starbucks’ market cap is five times the size of the silver market.
You can see that the silver market is also much smaller than gold’s. Around 75 million ounces of gold are produced each year. At $1,100 per ounce, the gold market is valued at $82.5 billion, roughly six times larger than silver.
The silver story carries a precautionary note: silver is far more volatile than gold. The daily swings in silver’s price can have you reaching for your anxiety medication. But that’s part of the landscape in a small market. So don’t let big price swings scare you into selling your silver in a panic
The silver price is far more volatile than it is for gold. It doesn’t take much to push the price around (check the gold price per ounce). Overall, gold has about the same volatility as the S&P.
Investing in silver thus requires that you are prepared for large price swings, both up and down. Silver will rise more than gold in bull markets and fall more than gold in bear markets.
|Tiny industry means price is volatile||Dominant use is as money, so less impacted by recession (learn where to buy gold and how to buy gold)|
|Half of demand is industrial use, so price is susceptible to economic slowdown||6 times bigger than silver market, no more volatile than the S&P|
As investors, we want to know if the silver price is high or low at any given time. Does it represent a good or poor value at current prices? So how does one value silver?
The surprising answer is, you can’t. At least not in the traditional sense. Silver is not a company that releases quarterly reports and pays dividends. It’s not a currency where we could look at the balance sheet of the issuing country.
Based on silver’s use, the most accurate portrayal is as a commodity/currency hybrid. It’s used heavily in both industry and as money. This makes valuation even more difficult.
One of the best ways to value silver—and it’s not perfect—is to compare it to other assets. Here’s a look at the most common valuation ratios:
One of the more popular methods is to compare it to gold. 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 overvalued it is.
Here are some historical references to suggest whether the current number is high or low:
The gold-to-silver ratio averaged 47 during the 20th century.
It has averaged about 60 so far this century.
It fell to nearly 30 during the big advance in precious metals in 2011.
It hit 17 in January 1980 during the height of that bull-market mania.
A ratio at 70 or above is rare and signals silver is significantly undervalued. As with all ratio analysis, however, that does not mean the price can’t go lower; it means it is undervalued relative to gold.
This ratio compares the silver price to the broad stock market. To calculate, multiply silver by 100 and divide that number by the S&P. The lower the number, the lower silver’s value relative to the S&P Index (and vice versa).
Here’s some context:
The ratio hit 5 in early 1980 during the peak of the mania.
It bottomed at 0.4 in 1999... the bear-market low.
It exceeded 3.5 in 2011 at the peak of the bull market.
Again, a low ratio doesn’t mean silver’s price is headed higher. The S&P could fall while silver stays flat, and the ratio would drop. However, a low ratio does offer greater value than when it’s high.
You can also just look at the price itself and compare it to past prices.
Here are some historical price points:
Silver hit $50 in January 1980 and $48.50 in April 2011. Both were bull-market peaks.
It fell to $3.56 in early 1993. Its low point this century was $4.06 in November 2001.
Silver’s annual average in the final year of the 1970s bull market was $21.79. Its 2011 average—the peak of the bull market that began in 2001—was $35.11.
Of course, we can’t say that silver is worth the same today as it was in 1980 when Jimmy Carter was president.
Here’s what the above historical prices would be today after adjusting for inflation:
In other words, when taking inflation into account(and relative to its prior highs and lows), the current silver price is historically undervalued.
Gold/silver ratio: Between 50 and 60 is an average range. 70 means silver is highly undervalued compared to gold and is at a good buy point for investors. However, 80 indicates an extreme undervaluation.
Silver is overvalued compared to gold at 40 and below. 30 or below is an extreme reading and means you should consider lightening up on silver once the price trend starts to reverse.
Silver/S&P ratio: A number below 1.0 means silver is historically undervalued compared to the S&P. A reading above 3.5 should elicit caution from silver investors.
Historical nominal and inflation-adjusted prices: A silver price below $20 historically indicates it is undervalued, especially when adjusted for inflation.
Remember, a high ratio does not mean the price won’t fall; likewise, a low ratio does not guarantee that the price won’t rise more. It only means silver is expensive or cheap relative to other assets.
There are four core factors that influence the silver market. While it usually takes a combination of factors to move the price significantly, notice that most of these are currently bullish for silver.
Like any asset, supply and demand impact its price. If supply steadily increases and demand is flat or falls, this will weigh on the price. The reverse is also true: if supply falls and demand is static or rises, this will tend to push prices higher.
Supply comes from three primary sources:
mine production from primary silver mines
base metal mines that produce silver as a byproduct
recycling (also called scrap)
Demand for silver comes from three primary sources:
Of the three, investment demand fluctuates the most. So a large rise or fall in demand from investors will tend to push the price the most.
We must consider China, too, as it has become a very big player in the silver industry. Just five years ago, China held only a minor role.
The futures market in Shanghai trades in physical metal, not paper contracts like the US. As a result, inventory levels at the exchange offer clues about demand within the country. From 2013 to 2015, silver inventories in China have fallen a whopping 90%.
Watch demand for physical metal. As a buyer, it’s hard to go wrong if you see strong demand, especially if the price is weak.
You can check silver supply and demand at the SilverInstitute.org. While official figures are usually updated only annually, the agency regularly reports on trends.
This one is simple. Since half of all silver is used in industry, a vibrant economy will use increasing amounts of silver and support prices. Conversely, a weak or recessionary economy will depress industrial demand and pressure the price.
This is not the case with gold. Gold’s primary use—is as money.
In a deflationary depression, gold could hold its own, while silver would almost certainly fall.
Silver can do well in a crisis, like gold. But if the crisis stems from a downturn in economic activity, and there is little inflation, expect the price to suffer.
Watch the Gross Domestic Product (GDP), one of the strongest indicators of economic growth. It’s updated quarterly in the US, which you can check here: http://bea.gov/newsreleases/news_release_sort_national.htm You can also check other countries here: http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
Like many assets, the popular opinion of consumers and investors about silver will affect its price.
A negative attitude doesn’t necessarily mean a dislike of silver. It can also signal that potential buyers see little current need to own it, or they’re interested in other investments.
If the stock market is rising, interest in silver is typically low. If the stock market is performing poorly, investors tend to look at alternative investments like silver.
There are a number of sites that measure sentiment; SentimentTrader.com is a good one.
Arguably the most significant catalyst for silver is inflation. Or the expectation of inflation.
Silver’s record high was recorded in January 1980 when inflation reached 14%.
Silver reached $48.50 in 2011 when investors feared inflation would result from the money-printing efforts undertaken by governments.
If you think inflation is in on the horizon, silver offers an excellent hedge. If you think deflation is coming, you would probably want to lighten up on your silver holdings.
One caution... If deflation persists or amplifies, then central banks tend to have a more aggressive inflationary response. In other words, inflation is the more likely end game. If I’m right, silver will do very well, perhaps even better than gold due to its volatility.
Get Consumer Price (CPI) information at http://www.bls.gov/cpi/ which is released monthly.
***Note: Some investors think the CPI does not accurately reflect real-world price inflation. If you share this concern, check out ShadowStats.com
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