Silver investing continues to make sound financial sense. Supply and demand factors exert upward pressure on long-term silver prices. Although silver production rose 4 percent in 2012 to an all-time high of 787 million ounces, its use in medical equipment, electronics, solar power, jewelry, fine silver utensils and serving goods, film, computers, televisions, appliances, transportation (airplanes, ships, trains and autos), and so many other items decreases silver stores each year, consumes silver. According to author Dan Durrett, a global store of about 10 billion ounces of silver coins and bullion existed in 1945. In 2010, earth’s known silver stores declined to about 1.5 billion ounces. Silver’s industrial use and manufacturing consumption is an important consideration for silver investors. Once silver is consumed, it’s gone forever.
Silver investing fundamentals. The Silver Institute says that total silver demand from all sources continues to exceed fabrication levels. For example, net investment in silver in 2012 was only about 160 million ounces; this investment level rose from a mere 55 million ounces several years ago. Importantly, silver investors or speculators don’t control the silver market.
Total demand for silver in 2012 was approximately 1048.3 billion ounces. Net government silver sales levels fell to a 15-year low in 2012. Russia, India and China also sold less silver during the year. Recovered scrap silver levels fell. Costs to mine silver rose 9 percent, about $8.88 per ounce, over the period. The cost of silver floats according to the net number of buyers and sellers. High costs to mine silver, combined with decreasing silver stores, could cause buyers like Apple, GE, Sony and Nokia to drive up silver prices.
Like other precious metals, volatile silver prices don’t rise in a straight line. Corrections, or a pullback in prices, provides long-term investors with an opportunity to achieve a lower average cost basis. Because many buyers and sellers trade silver, an established global market facilitates liquidity, or the ability to sell silver coins and bullion on demand. Using a reputable dealer to buy and sell silver in an important consideration. Clients should look for dealer with a ‘low risk’ financial rating from Dun & Bradstreet, such as Monex.com.
The top ten silver producing countries (responsible for about 85 percent of the world’s silver fabrication) include: Peru, Mexico, China, Australia, Chile, Poland, Russia, United States and Canada.
Trading ratios: gold-silver. Silver is more plentiful than gold, although silver in its investment form is actually much more scarce than gold! During the ninetieth century, the gold-silver ratio was much lower (at an average 16!). Over the past five years, the gold-silver ratio traded at a high of 83.73 and a low of 31.68. Author Durrett predicts a 20 to 30 gold-silver ratio trading range in the future as silver stores continue to decline. A decline in the gold-silver ratio would mean much higher silver prices.
A higher current gold-silver ratio implies that silver represents better value than gold, especially for long-term investors. Some traders typically sell a percentage of precious metals holdings to invest in rising stock markets. However, the highest period of silver investors aren’t traders. Owning physical silver bullion and coins helps investors to diversify other financial assets and holdings in a portfolio.
Only a small percentage of the world’s available silver supply is available for physical delivery. In the 1990s, investor Warren Buffett was able to amass 130 million ounces of silver, about 16 percent of the world’s supply at that time. (This accomplishment would be difficult to achieve in today’s silver market.) Buffett sold silver at an average price of $5.00/ounce, a decision he regrets.
Global economic concerns and silver investing. Precious metals possess ‘crisis value’ and serve to hedge a total financial portfolio against inflation. Uncertain economic conditions, global debt market levels and oil production levels are factors that affect investor interest in precious metals like silver. The likelihood of favorably resolving any of these concerning economic factors is slim. Silver prices, along with other precious metals, should rise either due to supply-demand relationships or another financial crisis. Post-globalized financial markets react to crisis in concert, as witnessed by the global economic decline that began in 2008.
Silver investing and economy. Demand from manufacturing and industrial concerns would decrease during an economic crisis. Slowing demand from silver consumers would likely result. Silver mining activities would slow as decreased demand for new silver declined. Rising silver inventories could prompt some traders to sell silver and volatility in silver prices would result. But the ‘crisis value’ of silver would likely stimulate long-term buyers to take advantage of any temporary drop in industrial demand.
Unlike gold, silver isn’t currently a ‘monetary metal.’ Governments haven’t used silver to make currency for decades though economist Milton Friedman notes that silver’s historical importance as a monetary metal is well established. Though some investors consider silver as a cheaper investment proxy for gold, this important monetary metal distinction makes gold investment a safer alternative today.
Long-term silver investing. Silver offers a less expensive play in precious metals and, without a long-term investment strategy in silver, trading silver can be risky. In 2013, precious metals refineries in Switzerland report increasing international demand for silver and gold bars. Both long-term investors and ‘storage of value’ precious metals buyers have increased physical precious metals purchases in 2013.
Proprietary traders buy and sell precious metals, like silver, when currency (e.g. yen) and silver prices rise and fall. Such hedge fund trading activity can support or suppress silver prices. Leveraged purchases and sales of commodities traders also impacts precious metals prices. Therefore, silver and other precious metals’ prices are affected by speculative commodities market traders.
Although exchange traded funds (ETFs) have marginal short-term trading affect on silver and precious metals prices, author Durrett says that governments could appropriate precious metals from ETF holders and force liquidation to occur. A silver shortage or government crisis could prompt some governments to appropriate silver or gold from an ETF. For these reasons and others, investors should use proper asset allocation strategies and avoid speculative trading in silver and precious metals. Unless the investor has speculative capital (i.e., capital she can afford to lose), owning precious metals assets is a better silver investing strategy.
“How To Invest In Gold and Silver,” Dan Durrett (2010)