Silver has been in a bear market for some time now, being down a deep 27% this year and a whopping 55% from the peak it reached in 2011.
Needless to say, this has been discomforting to the growing number of silver investors in the Western world. (To meet booming demand, silver coin production has surged at the world’s mints and global holdings in exchange-traded products remain near a record high exceeding 600 million ounces.)
With the [US] dollar recovering strength this year and an improving [US] stock market, you may ask ‘Should I continue to hold an investment in silver?’
Obviously, each person needs to make his or her own financial decisions. In my view, the answer remains yes and below I list the 13 main drivers I believe will drive the silver price higher in the years ahead.
1. Silver, a hybrid precious/industrial metal, is a commodity play on global technological advancement. Silver was once highly dependent on the film photography industry, which collapsed into insignificance with the rise of the digital camera, a major reason for the metal’s weak price in the 1990s.
Today silver’s industrial demand is driven by brazing alloys and solders, growing electronic demand (smart phones, tablets, plasma panels and increasingly by new applications like silk-screened circuit paths and radio frequency ID tags) photovoltaics (solar panels) and new medical applications: silver is both biocidal and highly conductive.
2. Silver moves with gold. Though the metal exhibits more price volatility than gold as an investment asset, silver has been correlated more closely with gold than with anything else for two generations. Despite sometimes violent market swings, silver has kept pace with gold and has even outperformed it over much of the past decade. This is a return to normality, in my opinion, as the sister metals moved in tandem for thousands of years, notwithstanding the historical interruption between the 1870s and the 1930s, caused by adoptions of the Gold Standard.
3. As an investment metal, silver is more precious, less industrial. Silver is significantly more correlated with gold than with industrial metals, like copper, which means that the market regards it as more of a safe-haven precious metal than an economically sensitive industrial one. This was seen during the 2008 crisis: though silver declined, it outperformed collapsing stock markets and commodities by a wide margin. The exception was gold, which rose in that year.
4. Silver is rarer than gold in the investment world today. Total aboveground silver in all forms is worth approximately $800 billion, about one-tenth the value of the world’s gold.
Although there are 5 times more ounces of silver in the world, because gold is more than 50 times more expensive than its sister metal per ounce, the silver market is effectively much smaller. Silver is becoming rarer each year due to annual unrecoverable loss of tons of silver in industrial activities. Throughout history, tens of billions of ounces of silver have been used up in industrial production. Compare this fact with gold, the vast majority of which remains with us today.
5. Silver is a premier real asset for inflationary times. Sister metals gold and silver often outperform other real assets during periods of significant monetary expansion (they each surged over 2,000 percent in the 1970s) because they have a relatively small fixed supply, are nonperishable, liquid (as investments), easily storable, and historically recognized as alternatives to government-issued cash.
Over the last decade, a time of dramatic monetary experimentation, silver has outperformed all real assets (real estate, commodities – even gold) by a wide margin, not to mention the stock and bond markets. It also surged during the inflationary 1960s and 1970s. However, all real assets (houses, commodities, precious metals) have investment trade-offs, and silver’s risks are important to consider.
6. Government today is silver’s friend: Amidst global fiscal excess, unprecedented and extreme use of monetary tools is the only major policy our leaders have. To help the economy recover from the 2008 economic downturn, the worst since the Great Depression, global leaders assumed more debt than ever to reignite the economy (with credit).
With bloated balance sheets, expansionary fiscal policy options at present are limited and increased central bank money-printing, which is already being used around the world as a major policy tool, will be vital when the next recession arrives.
7. Large investment fund ownership of silver is in its infancy. Although the metal has been one of the winning investments of this new century, pension funds, insurance companies, and other large institutions managing tens of trillions in assets have largely ignored silver as a viable investment. Gold very recently was reincorporated into the financial system as the viable, respected financial asset it once was. In the scramble for scarce global real assets, institutional investors are likely to begin considering the investment merits of silver, which is highly correlated with gold.
8. The gold-silver ratio, a 3,000-year-old exchange rate, is out of historical balance. While gold is 8 times scarcer than silver (in terms of total ounces produced annually), its price is more than 50 times higher than silver’s. For 3,000 years in which the exchange rate could be observed, gold was 9 to 16 times more expensive, making today’s level historically extreme.
Now that many of the factors distorting the ratio have disappeared, it seems logical that the market exchange rate between the two should begin to approximate the difference in scarcity of each metal, which points to silver being significantly undervalued.
9. Like gold, silver is an ‘anti-bond’ and ‘non-stock’ – meaning it’s one of the few investment vehicles allowing a person to completely remove wealth from the financial system. Traditional financial assets represent claims on other entities.
To preserve their value, bonds require that a government or company make interest and principal payments; stocks require dividend payments and/or that management deliver on earnings expectations; derivatives of many kinds can require financial faith at multiple levels; and ultimately, the financial system itself relies on trust that world economic leaders will keep markets functioning properly by meeting their ever-expanding financial commitments.
Gold and silver, inert metals recognized for thousands of years as stores of wealth whose nature cannot be altered by human error, have value outside the financial system.
10. Growing global scarcity of safe assets that are not someone else’s liability. According to the International Monetary Fund, of the world’s potentially safe investment assets, 89 percent are bonds of some kind – that is to say, someone else’s debt. For those believing that ultimate financial safety should not involve lending money to a company or government (buying a bond), there is only gold, the other 11 percent. But given the scarcity of gold and other real assets that are not economically sensitive (as real estate and major commodities are), silver is increasingly being regarded as a viable alternative to gold, which it was for most of human civilization.
11. Anyone anywhere can buy silver. Silver is an investment that can be made in any country by virtually any person – even in countries where there is no stock exchange, where even apple, the fruit, is hard to find. An ounce of gold, presently worth in excess of $1,350, is an investment unreachable to most people in the world, and represents a difficult financial decision even for middle class families in the United States.
A $20 silver coin is something that can be bought by a great many people almost on a whim, a minor investment decision that chips away at globally scarce supply. If expectations for future inflation begin to rise – a concept that virtually any working adult understands – silver’s well-known positive sensitivity to higher prices in the economy and its very accessibility could make it an important asset for many.
12. The 1980s and 1990s bear market for precious metals had powerful drivers that no longer exist. In the 80′s the world’s two richest families conspired to manipulate silver and inadvertently caused a crash – along with plenty of metal-fearing fallout. This was surely a singular moment in history.
Also contributing to an overall headwind for the metals, central banks dumped an average 10 million ounces of gold for each of 20 years ending in 2008. This likely-unrepeatable event pushed gold from being close to 50 percent of global central bank reserves in 1980 to an all-time low of 14 percent in 2012.
Heavily weighted in dollar, euro, and yen reserves and fixed income securities, a number of central banks are diversifying back into gold. The 1990′s saw increased pressure on silver prices due to the collapse of film photography, the largest source of demand for the metal. But film photography is in silver’s past, a very small part of demand today, and investment demand has become the key driver.
13. Silver is an important investment asset in Asia, where demand has remained strong over thousands of years. Throughout Asia, but mostly in populous India and China silver, like gold, is a key investment asset worn and stored as a wealth instrument by a great many people.
Every year, generally late in the summer and into the fall, the silver and gold markets are deeply influenced by a major financial event–the Indian wedding season, which draws a substantial portion of the world’s precious metals as part of an enduring millennial tradition.
Silver’s Bottom in Sight?
In spite of present market conditions, this list helps us focus on the essential drivers of silver for the years ahead that distinguish the metal from other investment options.
Silver has the highest price sensitivity to inflation of any commodity or sector in the stock market, by far – and it most certainly outperforms bonds when the price level is rising in the economy.
If you believe – as I do – that the world’s monetary authorities will never allow deflation to take hold and that the odds of inflation climbing to some degree in the years ahead are significant, it makes sense to own some silver to diversify your investment portfolio. (The right percentage to hold is something you should carefully consider with an investment advisor.)
Timing any investment correctly is always a challenge, but silver’s price has fallen by half in the last two years and is beginning to show tentative signs of bottoming. Perhaps the worst has passed for silver.
Shayne McGuire
Contributing Writer, Money Morning
Ed Note: Shayne McGuire is a Managing Director and Head of Global Research at Teacher Retirement System of Texas, one of the world’s largest pension funds. He also manages the GBI Gold Fund.
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