SILVER SHINE MATCHES GOLD’S GLEAM
DAVID MORRISON
CFD MARKET STRATEGIST, GFT
PLENTY has been written about gold’s recent advance and its break above the $1,000 mark. And if you are bullish on the yellow metal you may also want to look at silver. Until the late 1800s, the gold-silver price ratio was fairly constant at around 15 to 1 due to their relative abundance and because they were both used as currency. But by the early 20th century this ratio had widened to 100 to 1 as supplies of silver increased relative to gold and simultaneously silver was dropped as a currency.
Silver became cheap and abundant as huge above-ground stocks existed. But the metal was found to have many useful properties, and has since been consumed extensively in industrial processes. The gold-silver price ratio moved back down to reach 15 to 1 in the 1980s but today, with gold at $1,000 and silver at $16.50, the ratio has risen to 60 to 1.
On the supply side, estimates put the total volume of gold production in all history at 5.3bn ounces, and 43bn for silver, giving us a ratio of 8 to 1. But of those 43bn ounces of silver, most have now been used up. In fact, estimates suggest that above-ground stocks now stand at only around 1bn ounces, whereas nearly all of the 5.3bn ounces of gold still exists.
In addition, silver has taken a hit because it has lost its status as an investment metal. For a long time, it has been considered solely as an industrial commodity and so has recently suffered on two counts: a perception that it is abundant, and the economic slowdown.
However, silver could well come back into favour as an investment vehicle. China is already encouraging its citizens to buy the physical metal and there is the potential for a supply shortage. Industrial consumption may continue to slow, but so will supply if the price of silver doesn’t appreciate considerably in relation to its production cost. Conversely, as we have seen recently, any improvement in investor sentiment has seen industrial metals spike up in price.