Gold and silver have both appreciated in price since the end of the 90′s. While gold has been a great investment during the last decade, silver may outperform gold substantially in the future for various reasons.
The gold to silver ratio
Silver is often called a poor man’s gold. The ratio between gold and silver has in most of recorded history fluctuated between 12 and 16 troy ounces of silver per troy ounce of gold. Today we see the gold-to-silver ratio fluctuating between 40 to 80 troy ounces of silver per troy ounce of gold. This shows that silver is extremely undervalued when compared to gold.
The disparity between the current gold to silver ratio and its value for most of history also shows that the potential upside in the price of silver is much higher than that of gold. Silver may very well outperform gold as demand increase.
Small silver supply
The amount of above ground silver is much smaller than the amount of above ground gold. Most of the gold ever mined in human history is still in existence and is hoarded in private vaults. The estimated amount of above ground gold is about 160,000 metric tonnes.
Most of the silver that is mined is used in industrial applications such as electronics and photography-related products. The amount of silver used in each product is very small. When these products come to the end of life, they are discarded along with the silver in landfills. While some silver is recycled, most is lost. This is why the above ground silver supply is estimated to be only about 30,000 metric tonnes. As such, there is more than 5 times more above ground gold than silver.
Great demand for silver in the information age
Silver is the metal with the best electrical and thermal conductivity known to man. The information age today is dominated by the wide adoption of smart phones and tablets. Inevitably, silver has become a crucial component for electronics because of its natural properties. Every piece of electronic equipment that requires electricity to operate will need silver. With a small supply of silver and great demand for it, one can imagine the potential upside of silver should there be tightness in the physical silver market.
With the silver price much lower than the gold price per gram, silver is often viewed more attractive with a lower barrier for investors. The low price of silver also makes it possible for large investors with huge capital to corner the small silver market sending its price sky high. The low price of silver is a great opportunity to buy silver while it lasts.
Silver has similar monetary properties as gold. It is portable, durable, fungible and is a store of value. This makes silver suitable to be used as money. In fact, silver has been used more often as money than gold throughout history. Silver´s lower value compared to gold historically made it an excellent choice for the masses to buy food and other daily necessities with.
Like gold, silver is an insurance in uncertain economic times. With record level debts permeating all areas of society, the financial system is becoming more and more fragile. Governments are printing money to cover up for unprecedented budget deficits and banks are creating money by extending loans to already overleveraged customers.
Precious metals have always thrived in uncertain economic climates. When you buy physical silver, you hold the actual real metal. There is no counterparty risk unlike paper assets. Wealth stored in physical silver does not depend on another party making good on their promises. As long as you take physical delivery of your silver, you have no counterparty risks and nothing is owed to you.
Silver on sale!
As we can see, there are many reasons for silver to be an outstanding investment. Supply is scarce and demand is increasing. Investment and monetary demand may very well grow much quicker than projected when the financial system crumbles, making silver an even more compelling investment.
If you buy silver, not only do you hold a financial asset, you also hold a metal which is used increasingly in a wide range of industries such as information technology, solar panels and medicine. This could equate to substantially higher prices for silver, in comparison to gold. If you buy silver at the current low prices, you get a great financial asset with historical usage as money, a metal that is increasingly used in technology and an asset with a tiny physical market where the supply can’t meet the projected demand.
With the price of silver trading close to an all-time low compared to gold, silver is very undervalued and overdue to revert back to its historical price ratio of 12 to 16 troy ounces of silver per troy ounce of gold.
In times of economic distress caused by inflation-fueled asset bubbles, it would be logical for the government and central banks to stifle monetary inflation to let the market cleanse out all the malinvestments. But with policy makers’ objective of staying in power, expansionary monetary policy is often the choice.
By trying to solve the problem of too much debt with more money printing and debt, inflation takes hold. The value of currencies will erode more and more with each monetary unit buying less. When people lose confidence in currencies, hyperinflation will lure around the corner. No unbacked currency has ever survived more than a couple of decades without destructing. When our current monetary system breaks down, people will panic to find assets that will hold their value. Historically, the most stable assets to retain value and purchasing power have been gold and silver.