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Investing in Silver
Silver, a metallic chemical element, known for its abundant electrical and thermal conductivity characteristics, is one of the world’s most widely used resources. Having been around for countless years, production of the element has increased periodically thanks to international exploration and technological advances over time. At present, total global production volume, on a yearly basis, surpasses 600 million ounces. The precious metal is used rather irreplaceably for several industrial purposes, electric power, battery production, the automotive industry, and numerous technological applications. Demand for the element is derived from three main sources: industrial needs, jewelry, and investment, with industrial being the most heavily weighted usage. Like many other commodities, silver can be valued and traded by almost all types of investors, on a global scale, through several different investment vehicles.
One way to evaluate silver as an investment is to look at the gold-to-silver ratio, which compares the price of gold to the price of silver. The historical ratio has varied drastically over time, from its most-narrow levels of about 16:1 back in the early 1800s, which is somewhat irrelevant at this juncture, to 35:1 in the 1970s. Since then, the ratio has oscillated between 35:1 and 98:1, and at present, the 30-day gold-to-silver ratio has been in the low-to-mid 50s. This ratio can be interpreted in different ways by different investors; however, in our view, assessing the ratio based on historical values will provide the greatest insight. For example, in 1990 the ratio was at a staggering 94.3, with gold and silver priced at $383 and $4.06 an ounce, respectively. In 2000, the ratio decreased to 56.4, as gold saw a decline in price to $279 and silver appreciated in price to $4.95. Our interpretation of this is that the price of gold and silver were drastically out of line, presenting an opportunity to buy silver. While this represents only one of many factors that can influence the price of silver, we believe it is worth considering in the due diligence process to spot an overbought or underbought relationship between the two metals’ prices over a longer-time frame.
As an investment vehicle, silver offers several avenues of exposure. One of the most popular methods is to buy the physical commodity in the form of bars or coins, allowing the investor to directly benefit if the price of silver increases. Also, the physical holding can act as legal tender in some instances. For investors looking to gain exposure in a market setting, Exchange Traded Funds (ETF’s) are a suitable option. This relieves the investor of holding the physical metal, all the while replicating the benefits of price appreciation. Vehicles such as the iShares Silver Trust (SLV) track the price of silver and can be traded similarly to traditional equity securities. Additionally, taking a position in a mining company can expose one’s portfolio to the precious metal. However, these stocks usually are not correlated to the price of silver, but rather to the demand for and pace at which it is mined. Indeed, there are other factors that investors ought to be aware of that contribute to the value of individual mining stocks.
Overall, the commodity’s outlook for the year-ahead is positive. Prices for silver, for either investment or industrial purposes, have been driven higher over the past several years, stemming from increased demand. We expect this price momentum, resulting from higher necessity, to persist in both the near and intermediate term. Silver is also associated with a “flight to safety” mentality, similar to gold, meaning that in times of market uncertainty and fear of overweight equity exposure, investors will allocate more capital to these relatively conservative investments. Moreover, a lack of substitutions for the precious metal, due to its unique characteristics, augurs well over the long haul. In our view, silver is a solid addition to any investor’s portfolio to hedge currency risk, as well as reap the benefits of potential price appreciation further down the road. As always, investors should take into consideration their own investment objectives and risk tolerance before establishing a position.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.