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Traditionally when one mentions investing in precious metals gold is usually the first thing people think of. But let's look at 2 key reasons as to why silver could be an even better investment.
The Gold-Silver Ratio (GSR) is calculated by dividing the price of gold by the price of silver. It measures how many silver ounces you can buy with one ounce of gold. The gold vs silver ratio is a very popular tool to compare the performance between gold and silver.
Whilst broadly the two metals’ prices follow each other the extent to which they do varies, hence that changing ratio. Over the last century the average GSR has been around 45:1. The last low we saw was in 2011 when silver hit $50/oz and the GSR was 32:1. At the time of writing it was at an historically high 85:1. The chart below illustrates that each time it hits 80 there has been a reversion which sees both gold and silver prices rise. Indeed if you forget all other influences and look coldly at maths, reversion of the mean from a high sees silver outperform gold. That gold takes off too just adds to the effect.
This gives many investors reason to believe that a marked correction to the downside of the gold-silver ratio must occur sometime soon. In this century, since the Federal Reserve was created, there has been three occasions when the gold-silver ratio has been below 17 – 1919, 1968, and 1980. The gold-silver ratio is just one factor that you should look at.
If the ratio returns to16:1 that implies a 530% gain in the silver price off the current 85:1 levels. In dollar terms, 20c becomes $1.05/oz whilst assuming the gold price doesn’t even move which as you can see from the chart above, it normally does.
Unlike gold, around half of all the silver produced is used in industry. That means it effectively wears ‘2 hats’ – investment and jewellery precious metal, and industrial metal. Each has different economic drivers and hence broadens the catalysts for the silver price.
Of all the elements, silver is the indispensable metal. It is the most electrically conductive, thermally conductive, and reflective. It also has unique anti-bacterial or biocide properties. Some of its hundreds of applications include: Batteries, biocides, catalysts, electrical conductors, electroplating, jewellery, medical applications, mirror reflective coatings, photography, silverware, solar energy cells, soldering and water purification.
Whilst the whole world is moving more to sustainable solar power, significantly the 2 most populous countries, China and India are on a massive state dictated push toward solar power. In 2016 alone silver PV use increased an incredible 43% over 2015 to 2400 tonne. The chart below shows this is just the beginning.
All of this is going to require more physical silver. Have another read through that list of uses above. The reality is most of those uses are disposed of after use so the silver isn’t even readily recovered, its gone.
Like gold, silver supply looks to have peaked with fewer new discoveries, existing deposits harder to mine, and yields dropping. When combined with that growing demand the Economics 101 Supply and Demand equation starts to looks very appealing.
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