Ideally, gold and silver prices should be in the ratio of 20:1 as their distribution in the earth’s crust is along these lines. This is hardly the case now. As of 7th December 2015, gold was selling at $1085.80 an ounce while silver prices stood at $14.54 an ounce. As per the thumb rule given above, silver should be priced at atleast $50 an ounce! The ratio of 20:1 has not been followed, even in historic days. However, it has tended to remain in 14:1 or 16:1 ratio for most of the last century. The current ratio is way above logical figures at more than 75:1.
If we leave the valuations based on ratio and concentrate on price volatility, silver rates have dropped by almost 2/3rd of their value in recent times while gold has fallen by less than half. Such mismatch is likely to get corrected in future, though it’s no guarantee how the commodities markets will play out in future.
Silver production has been increasing as prices have fallen constantly over the last 3 years. This mismatch is likely to subside in the coming years as new mines are not being built at earlier rates and old mines are slowly declining. While it is true that over 2/3rd of silver production is as a by-product in the mining of metals like gold and copper, depreciating rates of these metals have also contributed to low mining activity, and consequently lower silver production.
Top movers of demand
Both consumer and industrial demand for silver affect its prices, and both sectors are likely to see rejuvenated interest in the near future.
Silver demand has been picking up in the industrial sector. The historical buyers of bulk silver, namely industries are slowly picking up demand in India and elsewhere. More than half of silver demand has been from these sectors, primary among which is the renewable energy sector. Solar panels require silver, and solar panels are soon going to be everywhere. In fact, almost 20 grams of silver is there in a single solar cell. Now compare that to proposed installation of almost half-a-billion solar panels in the United States by 2027, according to some estimates.
The biotechnology as well and nanotechnology industries are enjoying the benefits of using silver in various equipment owing to its amazing properties. Silver nano particles are known anti-bacterial agent and their application have been improved in various day-to-day appliances such as refrigerators, washing machines, air conditioners etc.
Coins are selling more as India looks toward silver as an alternative to gold. And India being the top importer of gold due to its voracious internal consumption, a move to silver, even moderate, can spur silver rates.
Besides coins, the upwardly mobile urban population is also getting interested in purchasing precious metals, with gold being the top choice. However, silver is close behind and more and more young people are preferring to buy silver as a form of gift or for savings purposes. The rural populace, which felt the sting of a weak monsoon, are also interest in buying silver and related products in the short term.
What does all this mean?
All this means that silver demand is slowly but steadily picking up, while production from mining or as a by-product is likely to deplete in the coming years. A combination of both these factors implies upcoming price appreciations which will most likely continue over the long term.
On the other hand, gold and silver rates this year have been very volatile. After hitting 5 year lows in late July and early August, the seasonal demand in November and December picked up but still couldn’t spur rates to the high levels experienced at the start of the year. Where silver rates declined by more than 70% through the year, gold rates were pretty steady at around 40% decline. This implies that gold rates may experience further fall while silver may stay stable at its current rates in the near future.
Another important short term implication on silver rates is the movement of the US Dollar. As the US Fed looks set to increase rates in the coming weeks, gold and silver rates have picked up. Such movements are likely to happen sporadically over time and also contribute toward rate appreciation. Similarly, however rate cuts tend to reduce value of commodities, but all of it tends to get uniform in the long run.
The way ahead
Silver has been underappreciated as a long term investment by consumers. With prices at low levels and expected appreciations in the future, silver investments might just trump returns from gold in the coming times. Silver, as per the trends observed through this year, is likely to appreciate over time and can be banked on as a long term investment. Commodities markets, being as unpredictable as they are, are still a preferred choice for a wide range of investors and benefitting from silver is a possibility for them. You should however consult with your personal financial advisors before making long term investments in commodities.