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Wednesday, December 19th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Silver: Investment of the Decade, Or Conservative Bubble?

With headlines calling for $8,000 gold by 2015 and $50 silver by 2011, the word “bubble” may very well soon be tip of the tongue. Are silver and the precious metals market overvalued, or are we merely witnessing the start of what will be a hyperbolic rise in silver prices in the coming years? While no outcome is certain — taking into account surging fears of dollar debasement, hyperinflation from emerging economies, and the removal of certain key price-depressing mechanisms — silver is poised to be a remarkably unique investment opportunity for the coming decade.

While silver may be colloquially referred to as “poor man’s gold,” the metal is in many ways rarer than gold itself. Silver has the highest electrical conductivity of any metal, and the highest thermal conductivity of any element. Ideally, wires would be made out of silver and not copper, but obviously the high price ($30/oz vs. $4/lb) renders this impossible. Silver is invaluable as a catalyst in industrial applications. Half of the demand for silver comes from these industrial applications, unlike gold, where the majority of the demand is investment-related.

China Is Buying

The net supply of silver (total amount mined + amount available from government sales) has stagnated over the past decade, hovering around 900 million ounces. While mine production is up nearly 20% in the decade, dramatic cuts in government selling of the metal have kept the supply relatively constant. Of the 700 million ounces mined last year, 352.2 million were used by industrial applications.

China has an annual production capacity of 90 million ounces of silver per year, much of which had been going to Japan for electronics production. However, a dramatic shift has occurred in the past five years, where the market has witnessed China transitioning from a net exporter (100 million ounces in 2004) to a net importer (110 million ounces in 2010). The Chinese government is no longer selling its silver and, along with India, is heavily buying precious metals.

The net silver supply from above-ground stocks fell 86 percent to 20.2 millin ounces in 2009, driven by a surge in net investment, higher de-hedging, lower government sales and a drop in scrap supply. In 2009, 136.9 million ounces were purchased by investors, up from 37.4 million ounces in 2004.

Silver Pricing

Silver has surged in price by 61% in the last six months, with heavy buying coming from both the public and private sector. The U.S. Mint sold a record 3,775,000 of its silver eagle rounds in November, in part due to an Internet video that went viral urging people to buy silver and bring down JP Morgan (JPM). Silver is now valued at around 1/46th of gold. Historically, the silver:gold ratio has been about 16.

Currently we are at a point where silver is considered very cheap to gold, and at such a high ratio remains a good investment opportunity regardless of the fact that silver has risen to nearly $30/oz. With recent reports pegging JP Morgan to manipulation of silver prices, there remains even further impetus for higher prices as these gigantic notional positions are unwound.

End Game

With many calling for prices as high as $500/oz, any rational investor would do well to step back and examine the market forces that are shaping the price of the market. With stagnant supply, surging demand from investment, and upward-bias from short covering, silver appears very poised to continue the move higher.

Given the backdrop of a declining dollar and talk of perpetuating the current quantitative easing campaign, it’s not difficult to see why the Chinese population is eager to stock up on precious metals. Silver offers a unique store of value for the everyday person to hedge against the ultimate depreciation of a fiat currency. Despite prices revolving around 30-year highs, dips should be purchased around key moving averages in the $28 range, as a natural return to the mean silver:gold ratio predicts at the very least $50 silver.

Disclosure: I am long SLV.

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