Silver is becoming a better and better buy against gold and this trend has gathered momentum from mid 2003. Since then the metal has enjoyed double-digit gains every subsequent year. Currently (as of May 15) silver is trading around $16.93 (Dh62.18) per ounce and had earlier hit a peak of $21.24/oz on March 17. Though silver prices are more volatile than gold prices, the year-over-year returns are usually higher than that of gold.
Returns from silver till date have been to the tune of 14.47 per cent versus a meager 6.24 per cent of gold. Prior to the correction that we saw in the last week of March, silver's returns were almost double than that of gold – 43 per cent as against 23 per cent of gold. This higher return has resulted in many traders and investors buying silver and forgoing gold. Lower cost price, ease to hold and wide industrial utilities make silver an attractive investment option.
Silver sold for $49.45/oz in 1980 and the recent high of $21.24 is less than half of the all time highs. Gold on the other hand had surged to $1,030 (on May 17), breaching its previous high of $850 made in 1980.
Fundamentally silver is far better positioned than that of gold. While gold is generally regarded as a monetary asset, silver is a precious metal and also an industrial metal. The industrial demand of silver is growing at about three per cent per year. It is important to understand that in almost all instances, the amount of silver used in a mobile phone, laptop or microwave oven is so small that it cannot be recovered. The small amount of silver that is used makes it an insignificant factor in the price of the product, ie the demand is inelastic. Hence as the industrial demand rises, more silver is getting lost almost permanently.
The emergence of digital photography has been argued as a negative fact for silver. But we deny this myth considering the following facts. About 23 to 25 per cent of the total supply of silver comes from "scrap" and most of this scrap is from photo recycling. More CDs, laptops and desktop computers are being used to store these digital photos, which use silver and most of it in an irrecoverable form. In normal photography, which uses silver halide for processing, the metal is never lost completely.
The super conductivity of silver vis-à-vis other metals is expected to be utilised further as international economic growth accelerates and more efficient power transmission comes into demand. Likewise there are many other utilities of silver in water purification, sterilisation, biotechnology and electronic appliances. There are a very small number of substitutes for silver. Along with the demand-push factor in prices, the dwindling supply of the metal is an additional factor that could drive prices higher in the coming years.
The gold-silver ratio that is arrived by dividing the price of gold by the price of silver is on a steady decline. This means that the amount of silver needed to buy a unit of gold is declining and this hints at the additional demand for silver. From the highs of 1980 to mid-2003, the ratio has slipped to as low as 51.
To put the above facts in perspective, it is ideal to retain investment or attempt fresh investments in silver as the bull market has sufficient upside potential. But riding the silver bull is not an easy task and big correction would have to be encountered on the path.
In the medium term, there are fair chances for the metal to drop below $16/oz, but if it manages to sustain above $15.5/oz in the process, a buying spree may be triggered again.
Silver may not carry the same flare as gold jewellery, but it is certainly far more rewarding from the investment point of view. Smart investors do the best that others do at last. So be among the best and enjoy the silver bull ride.
The author is an assistant vice-president on the Research and Trading Wing of Vision Commodities Services, DMCC.