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Silver's shine versus gold's glitter

Gold is the preeminent monetary metal, and throughout history to this day, it has projected the most enduring images of wealth. Consider how often gold bars are used to depict glamour and riches. Silver is in its shadows, but as an asset, it contains similar wealth-protecting qualities, perhaps with even greater return potential.

Unlike physical gold, which is used very little in industry, physical silver is an input in a wide range of industries including photography, medicine, defence and electronics. Silver is the best conductor of electricity and heat and is a highly reflective metal.

Modern medicine has recently rediscovered silver's anti-bacterial qualities, with its germ-fighting properties leading to an explosion in products containing silver. From silver-impregnated sportswear (to kill the germs which cause body odour), fabrics for public transport and airline seats to prevent the spread of infections, coatings for fridges and washing machines and even in antiperspirant sprays and band-aids.

As the best conductor of electricity, silver is used in solar panels to increase efficiency and in wiring, switches and soldering contacts. Silver oxide batteries (probably like the one in your watch) are increasingly used to power larger devices as they store the most power relative to size of any battery.

Silver is also used in iPhones, iPads, cell phones and flat screen televisions, with over 10,000 known industrial applications.

Silver prices are currently relatively low, making recycling largely uneconomic and therefore, much of the silver used in products is lost to landfill. This may change if the price rises substantially, but for now, it’s a bullish factor underpinning the silver market.

Silver as monetary metal

Whilst silver is heavily used in industry, it has an incredible history as a monetary metal. Known as Argentum in Latin, the Ancient Egyptians, Lydians, the Greeks, and the British all valued and used silver as a monetary asset.

There is a reason why British money is referred to as Pound Sterling. Indeed, the term dollar can be traced back to the 1530s, and a legendary Bohemian silver mine near Joachimsthal, which at its peak produced over three million ounces of silver a year.

The coins produced from this mine were called Joachimsthaler, or ‘thaler’ for short, and these silver coins formed the basis of the Dutch ‘daalder’. The ‘daalder’ became the most popular trading currency in the Dutch founded town of New Amsterdam, known today as New York, where they were known as dollars.

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Current demand and supply

The chart below shows the breakdown of silver demand over the last 10 years, as well as the move in the US$ silver price over this time. Approximately half of the demand comes from industrial applications, with jewellery and implied net investment, predominantly bars and coins, comprising the majority of the rest. Investment demand has increased markedly over this period, with bar and coins sales tripling between 2007 and 2016.

silver market

silver market

Source: GFMS via Thomson Reuters, ABC Bullion

The majority of the current supply comes direct from mine production, with about 20% of total supply across the last 10 years coming from silver scrap. A significant portion is mined as a by-product, meaning that the mine the silver is coming from is predominantly in place to produce other metals, like gold, copper, or zinc and lead, with more than half of the silver coming from Latin America.

The fact that silver is so often a by-product adds a degree of inelasticity to supply, in that a copper miner isn’t going to increase production if the price of copper is falling or stagnant, just because the silver price is rising. The miners are often not overly interested in the silver, as it probably only consists of a small portion of the miners’ overall revenue.

Net government sales were a source of supply to the market until recently, but have effectively stopped, as national silver bullion reserves the world over are all but completely depleted.

The gold/silver ratio and the future of the silver market

Whilst we expect silver to be the more volatile of the two monetary metals, the gold/silver ratio (GSR), which measures how many ounces of silver one needs to buy one ounce of gold highlights why we believe silver prices may rise by more, in percentage terms, than gold in the coming years.

The GSR is currently about 78, with gold at US$1,260 an ounce and silver at about US$16.20 an ounce. This is nearly 20% above the average of the last 30 years, a timeframe in which the GSR has averaged just over 66. Indeed, as per the chart below, the GSR is currently at a level that has only been exceeded once in the past 30 years.

silver market

Going forward, there are a handful of reasons why the GSR should be lower than the current reading of 78.

Firstly, as per the chart above, since the turn of the century, the GSR has approached current readings three times, back in early 2003, again in late 2008, and toward the end of 2015. Each proved good buying points for precious metals, with silver in particular rallying from these levels in the subsequent year, with average gains of nearly 20%.

Geology and mine production are factors too. Gold occurs in the earth at a rate of 4 parts per billion (PPB), whilst silver occurs at 75 PPB. This ratio of about 19:1 indicates that there is roughly 19 times more silver in the ground compared to gold. Given gold production has averaged around 2,800 tonnes per annum over the last decade, one might expect (based on a silver/gold PPB ratio of 19:1), that about 53,000 tonnes of silver would be mined each. In reality, primary mine supply is barely half that, with the latest data from the Silver Institute suggesting annual silver mine production is just 27,500 tonnes.

Industrial demand, should global growth accelerate from here could also propel silver prices in the years ahead. Industrial demand is essentially a non-factor in the gold market, but a major factor in the silver market. As such, silver stands to benefit if governments get their wish of higher global demand and a pick-up in inflation, which they almost certainly will should they unleash fresh bouts of fiscal stimulus.

Finally, it’s worth looking at the size of the gold and silver markets from an investor’s perspective. Gold demand in 2016 was just over 4,300 tonnes, worth over US$170 billion at an average price of US$1250/oz. Silver demand on the other hand came to just shy of US$18 billion, meaning gold demand was nearly ten times higher than silver demand.

As such, it takes less dollars to move the silver market, a factor that may prove decisive if more investors seek to hedge their portfolios with a precious metals exposure. There are portfolio benefits of including precious metals in a diversified mix of assets.

Add all these factors together, and silver, a quasi-industrial metal with a rich monetary history, may be about to step out of gold’s shadow, and shine brightest in the years ahead.


Jordan Eliseo is Chief Economist at ABC Bullion. This article is general information and does not consider the circumstances of any individual.


The case for Australia to restore its gold reserves

August 10, 2017

The illusion of gold as wealth is just that, an illusion.

I use coca cola as a long term mean. Gold at US$35 an ounce on the gold standard, coca cola launched at $US40. All these years later, last time I looked, after splits the 1 coke share was now 9,600 shares. The shares are worth say $US400K. I never look at gold, say $US1250 an ounce. The coke shares produce say US$12,000 in income, the gold produces nothing. The shares have produced income for coming up to 100 yrs. The gold has produced nothing.

I will never understand why people buy gold.

Jordan Eliseo
August 10, 2017

Hi Kevin, There is no doubt an investment in Coke has proved fantastically profitable over the last 100 years, though this, and the performance of stocks in general does not preclude one from holding gold as part of a diversified portfolio. Whilst gold’s lack of income is its most obvious drawback (no investment is perfect), gold has provided the most effective hedge against stock market risk since the 1970s, something AQR referenced in a 2015 publication titled Good Strategies for Tough Times, outperforming traditional defensive assets (cash and bonds) whenever equity markets go through their periodic bouts of volatility. Gold is also highly liquid, and entirely devoid of credit risk, whilst its performance in in low ‘real’ rate environments (like the one we are in today), has historically been superior to that of equities, bonds and cash. Add all those qualities together, and it begins to make sense why one might invest in gold. The substantial uptick in physical gold and silver demand post GFC would indicate that more and more people are beginning to see precious metals in this light.


August 12, 2017

Hiya Jordan

Thanks for taking the time to reply. Substitute any company over a decent period of time and it will do better than gold (usually). Obviously the ones that go belly up don't.

Just using common sense and looking at an index. A bad time to start but gold @US$850 in 1980-ish, start the accumulation index @A$1000. I don't look at indices but is the acc index around A$50K now, I really haven't looked for years. On firmer ground but I'll probably still have the numbers wrong, all ords @500 1980-ish, now 5700? Plus all the dividends collected.

The Jeremy Seigal book Stocks for the long run, back on shaky ground. An investment of US$1 in 1800 in stocks, bonds and gold. From memory gold was around $1600,bonds were around $26,000,stocks around $500,000. Not sure if dividends were reinvested.Not sure if that is inflation adjusted or raw figures.

My wages in 1974 were around $4000 per annum. Gold around $200 per ounce. If I was working in my trade today probably $75-80K per annum. I've never understood the good hedge against inflation bit.

Back around then I was working in Germany on my young adventures bit. My bank was Commerzbank, both they and Hessen bank (a regional bank) were pushing Krugerrands as a wonderful investment. Thankfully I think I chose the right gold colour to lose money in, that wonderful German beer (bier). Along with the odd Jagermeister and Asbach brandy of course.

Thanks again

August 13, 2017

Thanks for your article. I think Silver is a good investment and the current GSR looks good for getting in for new entrants. The physical market being so small has been smashed down so much over the years, and it would take another Hunt Brothers moment to buy silver from the Chinese or a cashed up investor to really move silver to the upside.
With so much dumb money being tempted into Gold ETF's and perhaps Silver ETF's this has probably helped to not move the metal prices outside of a narrow band for like 6yrs now.
But if Bitcoin proves anything, that non government forms of money are gaining traction and for the less tech savvy I would say silver would be a more sensible buy than Bitcoin.

Gary Mac
August 10, 2017

I realise Jordan works for a bullion company, fair enough, but the article should note there are ETFs for gold, silver and other commodities on ASX.


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