Silver is a Monetary Metal and a Commodity
So why invest in silver? The reasons are manifold. 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.
Milton Friedman said that the “major monetary metal throughout history is silver, not gold.”
Money in the U.S. Constitution is defined in terms of silver. Article I, Section 10 of the U.S. Constitution states that no State can “make any Thing but Gold and Silver Coin a Tender in Payment of Debts”, in other words, only gold and silver coin can be legally used as money. The Coinage Act of 1792 specifically defined the U.S. dollar as “three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.”
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 a Tangible Asset and Important Diversification
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 geopolitical, 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, and investors in silver can accumulate more silver than gold, dollar for dollar. Also, silver is more affordable as buyers can dollar 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 50 ounces of silver but not even one ounce of gold.
The Gold-to-Silver Ratio
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.
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 volatility, the silver price would be expected to rise by a higher percentage than the gold price.
In the 1970’s bull markets of gold and silver, the silver price rose 3,800%, compared to 2,500% for gold.
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 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 the 1930s do not need to worry as much about the confiscation silver, since there is no historical precedent for silver confiscation.
Very few of the US public own silver as an investment, a risk we believe is under appreciated.