Like gold, silver retains its value in good and bad economic times. It has been an accepted and highly prized currency since ancient times, and is still used in the legal tender coins of many nations. But could silver also be a lucrative investment play for 2016 and beyond?
Although no one can predict when, the stage is set for the price of silver to rise dramatically. The first set of reasons all revolve around basic supply and demand. Silver producers are being hammered by low silver prices. At current prices, it is not profitable to mine silver. And even though silver prices have risen in the past few weeks, it still is not profitable to produce silver. This is because most silver is actually a byproduct of the extraction of other industrial metals, like zinc and copper. Those mines are under pressure due to low metal prices across the board. In Canada and Australia, some of these mines have already shut down.
Most of the silver supply comes from unstable countries, subject to corrupt regimes, narco-terrorism, currency destabilization and even nationalization of private enterprise. Bolivia and Mexico are two prime examples.
The supply of above-ground silver is a mere 1 billion ounces, compared to 5 billion ounces for gold. And that supply is not being replenished by recycling. Trace amounts of silver are incorporated into electronics and medical products, making it impractical to recycle.
In contrast to supply, demand for silver is strong and rising. Global mints are reporting extremely strong demand for silver bullion coins. Silver demand in 2009 was 87 million ounces, compared to 245 million ounces in 2014. American Silver Eagle coins, the official silver bullion coin of the United States, have completely sold out in 2015, 2014 and 2013.
China and India’s appetite for gold is well known, but their citizens also love silver both for jewelry and as a store of value. Unlike gold, silver is an industrial metal, indispensable to the world economy. It is vital to electronics and medical supplies, and has many more uses than other metals. Even in a recession, population growth will ensure the increased demand for medical products and electronics, and therefore silver.
Supply and demand will of course be influenced by future economic events. Which economic events that would affect the price of silver are most probable? It is widely agreed that the Federal Reserve’s QE policies have created bubbles in the stock and bond markets. In addition, the extremely low interest rate policy has caused massive borrowing, creating a ‘debt bubble’. When either or both of these bubbles bursts, as they inevitably must, it will drive investors to the safety of precious metals.
Although gold could rise markedly during a flight to safety, in relative terms silver could rise more. The most obvious reason for this is the current low price of silver. On a historical basis, it seems that the price of silver should be much higher than it is. In 2011, it was almost $50.00 per troy ounce.
A popular way to predict price movements is the ‘gold silver price ratio’, which shows how many ounces of silver it takes to buy an ounce of gold. Although the ratio was 12:1 in Roman times, commentators have set the ‘natural’ ration at 16:1.9 As of the writing of this article, the ratio is 82. Historically, the ratio has always corrected when it gets too high or low.
Billionaire hedge fund manager Paul Singer gets the final prediction: “Although the levitation of financial assets has yet to levitate gold, we will grit our collective teeth on that score and await either ‘asset price justice’ or the ‘end times,’ whichever comes first.” Along with levitating gold, asset price justice is likely to lift silver as well. Now with warnings of the next leg of the financial crisis surfacing almost daily, that demand could accelerate to an even higher level. The massive, artificial wealth built-up in the world’s stock and bond markets will be looking for a place to go and one likely beneficiary will be the underpriced gold and silver markets.”