Why Silver is a Better Investment Than Ever Before

Silver is currently undervalued compared to gold for a variety of reasons, and is set to continue to rise in price. Silver could easily triple in price in the next three years.

A Hedge Against the Dollar

The first reason to buy silver is the same reason to buy gold: there are numerous reasons to expect a Dollar crash. Placing part of your portfolio in precious metals gives you a hedge that can protect your portfolio when the value of your Dollar-based investments drops.

(1) U.S. Government debt is spiriling out of control. Both former Fed Chair Ben Bernanke and the Government Accounting Office have stated that the U.S. government's fiscal path is unsustainable.

(2) The Dollar is steadily losing its status as the world's reserve currency, and when that finally happens, inflation will skyrocket in the U.S.

(3) The Fed has become trapped in a stimulus program that it cannot exit. It has kept interest rates near zero since 2008. It has printed trillions of Dollars out of thin air and spent them into circulation. The Fed won't be able to raise interest rates and end the stimulus, because the economy has not been seeing a real recovery. As a result of the stimulus, the Fed is now holding $3.5 trillion on its balance sheet that it will be unable to dispose of. Former Fed Chair Alan Greenspan has said, "The Fed’s balance sheet is a pile of tinder, but it hasn't been lit … inflation will eventually have to rise."

A Dollar crash is inevitable; it is only a matter of time. Regardless of what happens with the U.S. economy, however, silver is a phenominal investment right now for its own unique reasons.

The Gold/Silver Price Ratio

The ratio of the price of gold to silver is often looked at by investors. If the price of silver was $10/oz and the price of gold was $100/oz, this would be a ratio of 10. Over the past century, the ratio has been as low as 16 and reached a high point in 1991 at 89.31 for the year. The ratio has recently been dropping, with the silver price gaining on the gold price, and as a result some experts are expecting the price of silver to fall relative to gold.

[Chart taken from US Inflation Report, National Inflation Association, June 2010]

Historically, however, the ratio has been much lower. In the 11th century, gold was only 10 times the price of silver. For 873 YEARS the ratio was 16 OR LESS! Based on today's gold price, if the gold/silver ratio returned to 16, the price of silver would be $90, or nearly triple what it is now. The fundamentals of the silver market suggest just such a move.

[Table taken from: A History of Money from 800 AD, John F Chown, 30 JAN 97]

Actual Quantities of Silver and Gold

Through history only 10 times more silver has been produced than gold and almost all of the silver produced has been consumed for industrial purposes. Only around 1 billion ounces of silver exists above ground today, worth around $18 billion. On the other hand, there is around 2 billion ounces of gold above ground, worth around $2.4 trillion. This means that despite the fact there is twice as much gold above ground, and from that point of view it is less rare, the total value of available gold bullion is worth 133 times more than the available silver bullion.[1]

One reason for the higher value of gold is that gold is more difficult to produce. Silver is primarily produced as a byproduct in the refining process of other metals. However, silver is also much more highly in demand than gold for industrial purposes and is constantly being consumed and taken out of circulation. It is estimated that through history, the total amount of silver produced is 40 billion ounces. This means that only 2.5% of that silver remains.[2] Silver is getting used up.

Industrial Use of Silver

In 2008, the world silver demand was as follows: 53 percent was for industrial use, 24 percent for jewelry and silverware, 13 percent for photography, 7 percent for coins, and 3 percent for investment. This means that 66% of the silver produced that year was consumed. Industrial uses of silver include: mirrors, electric cars, silver-zinc batteries, cell phones, laptops, iPods, televisions, and any appliances that have an electronic motherboard. Silver is also increasingly used for a variety of medical purposes. The medical use of silver is expected to increase by 100 million ounces by 2020.[3]

Perhaps the fastest growing industrial use of silver is for solar panels. Production of a typical solar panel uses about 20 grams of silver, or 2/3 of a Troy ounce. It takes 80 tons (or 2.56 million ounces) of silver to produce solar panels capable of producing one gigawatt (GW) of solar power. In July, 2010 the US authorized $1.85 billion in loan guarantees for solar production. India wants 20 GWs of solar power by 2020 (from almost zero now), while China wants 30 GWs (from 5.5). Europe wants total renewable energy to be 20% of energy production by 2020, from 10% in 2008. There was 7.2 GWs of new solar capacity installed worldwide in 2009. This climbed to an estimated 17.5 GWs installed in 2010, with 20.5 GWs expected for 2011, 23.3 GWs in 2013, and 40.9 GWs in 2019.[4]

The estimated total increase of the industrial use of silver by 2020 is around 350 million ounces a year. In 2009 the world silver production was about 680 million ounces. World production is expected to reach 790 million ounces by 2020. Leaving all other industrial use constant for the next ten years, the projected increase of industrial silver consumption is much greater than the rate of silver production. This alone will greatly increase the value of silver over the next decade.[3]

The Time is Now

Regardless of whether our current economy improves or worsens, there has never been a better time, perhaps ever in history, to buy silver.

[1] US Inflation Report, National Inflation Association, June 2010
[2] Real Silver Availability, Theodore Butler, 20 JAN 2009
[3] A Case for Silver, Young Bui, accessed 1 MAR11
[4] Rising Solar-Panel Generation Means Increasing Industrial Demand For Silver, Allen Sykora, 19 NOV 10

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