Valued for its decorative beauty, silver is a lustrous white metal (symbol Ag) used for producing cutlery, jewellery, coins, ornamental objects and commercial applications.
Aside from silver, other popular investment precious metals are gold, platinum and palladium. By far, silver is the most inexpensive.
Precious Metals: An Investment
The spot price of palladium has more than doubled in the past couple of years, currently worth more than gold bullion, trading at $2,351 an ounce.
Precious metals remain popular additions to investment portfolios, aiding diversification and as a hedge against inflation. In fact, the late Harry Browne, a legendary investment advisor and ex-presidential nominee for the United States Libertarian Party, insisted 25 percent of an investment portfolio should be in precious metals.
Although Browne favoured gold, modern investors, due to industrial applications, are likely to include additional precious metals.
Among other factors, increased industrial use of palladium is one of the main reasons behind its rise. Silver, according to some, has similar potential.
Silver: Industrial Demand
Silver boasts both industrial and investment appeal.
Industrial demand for silver in 2019 was 510.9 million ounces, accounting for more than 50 percent of annual demand worldwide.
Common industrial uses of silver:
- Radio Frequency Identification Device (RFID) chips’ paper-thin antennas consist of sprayed-on silver. The total RFID market is expected to rise 21.8% from 11.0bn USD in 2018 to 13.4bn USD in 2022.
- 20g of silver is used per solar panel, with rising demand for solar panels having a major effect on the worldwide price of silver, according to a 2019 paper by the University of Kent.
- Substitutability of silver is low in the electrical and electronics (E&E) industry. Few metals can conduct electricity as well as silver, therefore the white metal is used in most electronic gadgets. In addition, not many metals exceed the ductility of pure silver. In layman’s terms, the smaller the electronic gadget, the more essential the ductility factor. Since the global trend for E&E is shrinking gadget sizes, future appeal for silver is possible.
- As for the jewellery market, by virtue of silver being the cheapest (by a large margin) among the four major precious metals, a potential shift in consumer preferences to silver jewellery is on the table as consumers explore lower-priced options. Demand for silver jewellery more than doubled in FY20.
- On the supply side, silver production in Russia, a major silver producer, plunged 11% last year, potentially pushing up prices.
Investment Demand: Invest in Precious Metals
With the clear difference between the price of silver and other major precious metals, the question remains whether the market’s pricing of silver will eventually realign?
To help answer this, some investors calculate a gold to silver ratio. The problem is pure gold is usually quoted in troy ounces per US dollar whereas pure silver is quoted in ounces in many markets outside the United States. Therefore, you must first convert the price quoted in the silver market to troy ounces before calculating the ratio, which averaged to approximately 65:1 over the past 45 years.
According to mean reversion, an ounce of gold ought to be worth around 65 ounces of silver. Based on the closing price on 1 December, 2020, silver’s spot price is $23.95 while gold’s spot price is $1,815. This is a ratio of approximately 76:1.
COVID-19 Pandemic: Inflationary Pressures
In terms of an inflation hedge, silver has proven itself throughout history as a worthy junior to gold. Most fund managers will attest both metals are generally perceived as a safe-haven asset and a store of value.
With the COVID-19 pandemic expected to continue to weigh on the global economy into 2021, the US Federal Reserve and other central banks are expected to keep interest rates low for a prolonged period to encourage growth, which can eventually lead to an inflationary environment.
However, central banks are unlikely to have the luxury of raising rates to combat rising inflation if COVID-19 is not resolved as early as the market expects. Consequently, the world may endure elevated inflation in 2021, potentially boosting demand for inflation hedges.
In expectation of a bull market, silver investors have the freedom to explore a number of different investment avenues:
- Physical silver through bullion bars and bullion coins can be purchased directly, without resorting to metals trading in financial markets. Silver bullion, such as silver bars and silver coins are easily attainable if you are willing to pay the market price. It is considered cheaper to buy a silver bar (or a gold bar) through regulated assayers, compared to purchasing from jewellers. However, storage costs may be a problem.
- The easiest investment method to gain exposure to the silver market is probably through derivatives, such as silver-backed exchange-traded funds (silver etfs). The most famous is perhaps the iShares Silver Trust (SLV). However, by trading in derivatives you forego ownership.
- Aside from trading silver futures contracts on commodities exchanges, the metals CFD market could also be an option (both are derivative products). FP Markets offers the option of trading the spot price of gold or silver against the US dollar or Australian dollar as a currency pair, with flexible leverage options.