Why Silver Is An Undervalued Asset Class
These days, every where you turn you hear financial channel talking heads and economic analysts extolling the virtues of investing in gold. Between inflation threats, instability in the Middle East, financial troubles in the Euro Zone, and the teetering on the brink of double dip recession American economy, there are plenty of good reasons for the recommendation to buy the yellow metal that acts as a protective hedge against all of these threatening events.
What you may not know is that silver offers similar protection against such instability and economic chaos at a fraction of the price per ounce of gold. There are five main reasons why silver turns out to be a superior investment over gold that you will learn about in the following paragraphs.
1. Silver is Actually Rarer than Gold Today
The available stocks of silver bullion are less than are the readily available stocks of gold. The World Gold Council states that as many as four to five billion ounces of physical gold are still present in the world.
This is the case with gold since the most famous of precious metals is almost never used up; instead it is recycled from time to time from jewelry to coins to bars. Ninety-five percent of the gold ever mined in the history of the world is still above ground somewhere in a bank vault, coin shop, government hoard, or individual’s home.
Contrast these gold supply fundamentals with silver. As of the World Silver Survey in 2004, only six hundred and seventy-one million usable silver ounces existed above ground with which to meet world demand.
By the end of 2009, the above ground usable silver stocks had dropped to twenty million ounces. Even if you account for the greater investment demand for gold over silver today, the supply side of the equation tells you that silver should be worth far more than the $32 to $34 per ounce range where it trades these days, especially when gold is over $1,700 per ounce.
2. Silver is 90% Used Up by Consumer Goods And Stored in Land Fills
You may raise your eyebrows at the incredible suggestion that ninety percent of silver is used up in and lost with consumer goods today. As these consumer goods are disposed of, the silver goes to the land fill with them. When did silver become a disposable commodity? It began only a few years after the end of the second world war.
Industrial applications for silver have progressively grown since the 1940’s until ten thousand different applications for the metal have been found.
The overwhelming majority of these see the silver used and then discarded with the solar panels, television sets, mobile phones, electronics, photographs, batteries, hospital equipment, clothing, wiring, catheters, and so forth.
In fact, a staggering four hundred and fifty-five million plus ounces of silver that are mined each year go into these industrial products. Another one hundred and twenty-eight million ounces of silver are used in film production and developing. Another nearly sixty million ounces are designated to become silverware that decorates tables, drawers, and china cabinets around the world.
Only a hundred and sixty-three million silver ounces actually go into jewelry. The costly process of recovering and recycling silver simply does not make sense at the low silver prices on the world market. Since over ninety percent of all silver mined goes directly into industrial applications and consumer products, this makes silver a far better investment today than gold that is mostly used and re-used for coins, jewelry, and bars.
3. Silver is in Greater Demand than Gold
You have to understand the difference between simply investment demand and total demand. There is no doubt that gold is in greater investment demand than is silver by far. But because of its myriads of uses for industrial needs, consumer products, medical devices and equipment, silverware, and photography, silver is in significantly greater demand than gold overall.
More gold is mined each day than is needed by the world investment communities. For many years, a smaller amount of silver has been mined than is actually utilized. This puts silver in a supply and demand deficit that dates back to 1942.
So while there may be enough gold to satisfy investor demand for the precious metal most of the time, silver is constantly drawing down on the usable world silver reserves. As you will see in the next point, these reserves have run from enormous levels seventy years ago to dangerously low levels today.
4. Silver Production and Inventories Are Down
You can see how enormous an impact the silver supply and demand imbalance has created when you look at the history of world available silver stocks going back to the 1940’s. At the conclusion of World War II, the world silver stocks amounted to ten billion ounces.
An incredible four billion of these ounces, forty percent of world holdings, lay securely in the vaults of the U.S. government. Now there are approximately twenty million ounces of spare usable silver available in world stockpiles.
Today, the U.S. government has so few ounces in its reserves that it has to halt production of American silver eagles from time to time, not because it can not keep up with demand, but because it lacks the silver bullion to produce the blanks required for coinage.
Not only are silver inventories at shockingly low levels today as compared to gold, but silver possesses among the lowest ratios of reserves to production and the smallest reserve base to production ratio.
You can not argue with the fact that silver is the closest of all the commercially mined metals to actually reaching Hubert’s Peak, better known in pop culture by the name of peak production. When this point occurs, silver will see a smaller and smaller quantity of production every year than in the years before, since fully half of the silver reserves in existence below ground will have been brought to light.
The half of the silver that remains in the earth will only be located in more remote locations of the earth and in deeper places that are harder to reach. The silver that is mined in the future will be produced at prices that rise over time, according to the reality of peak silver production.
5. The Historical Silver to Gold Ratio
Throughout past history, silver has always existed at around twelve times the abundance of gold. This lead to a silver price of one twelfth that of gold. In point of fact, this relationship between gold and silver was a stable twelve to one throughout most of recorded human history.
At the world market prices today, gold is fifty-one times more expensive than silver per ounce. This argues for sharply higher silver prices at some point in the future, even if gold does not go up any higher in the years to come. Based on the mid $1,700 per ounce price of gold these days, silver should reach a level approaching one hundred and thirty dollar per ounce at some point.
In light of these critical revelations about silver, which of the two precious metals would you prefer to own for the maximum price appreciation potential?
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