Pockets: Silver lined

Published February 2013 in the magazine: Macau Business

by André Ribeiro

The silver market is relatively obscure and unknown to most mainstream individual investors. So, when considering investing in precious metals, most go for gold, largely because of the recent hype about its prospective returns. Few seem to know that the upswing forecast in silver prices is much higher.

Silver has been used for money throughout history by various civilisations. In several languages, the word silver is a synonym for money.

For centuries, China’s monetary system was based on a silver standard, abandoned only in 1935. From 1949 to 1982, private individuals in the mainland were forbidden to own gold and silver. The 2000 liberalisation of the silver market was one of a number of reforms.

Basic economic theory says the market price of any good is set by the relationship between supply and demand. For silver, growing demand and only slow growth in supply are the fundamental reasons that much higher prices are in prospect.

On the supply side, not many mines that primarily extract silver are in operation today. Most newly mined silver is a by-product of mining for other metals, including lead, zinc, copper and gold.

This means most mining companies that produce silver do not regard it as their core business or main source of revenue. They cannot easily respond to higher prices for silver by increasing their output rapidly or to any great extent.

Central banks do not keep huge reserves of silver like the hoards of gold in their vaults. So they have no big stockpiles to release to control prices when demand rises.

Waste of Metal
Demand for silver is rising, for industrial use and for investment. The imbalance of demand and supply has resulted in a bull market, silver prices having risen by over 450 percent since 2000.Of all the metals, silver is the best electrical and thermal conductor. Much of the industrial demand is from the electronics industry, which uses silver in devices such as smartphones, tablet and notebook computers, and television sets. Silver is also used to make photovoltaic cells – and production of photovoltaic cells is increasing rapidly.Since many of these products contain only tiny quantities of silver, there is little profit to be made in recovering the metal from them when they are thrown away. So the silver often remains in the rubbish dump.There are now several silver-linked exchange-traded funds, making it easier for retail investors to put their savings into the metal. Together, these funds held a total of around 600 million ounces of silver in the middle of November, according to estimates by ETF Securities. These exchange-traded funds mirror the price of silver, minus a management fee.The mainland has been playing a greater and greater role in the global silver market in the past decade. A few years ago, it was a marginal player, but no longer.

Cheap at the priceDemand from mainland investors has jumped in recent years. This has made the mainland the world’s leading market for investment in silver, whether in the form of the metal itself or in the form of paper such as silver futures and similar contracts, according to a recent Thomson Reuters GFMS report. The report says the mainland now supplies 14 percent of the world’s newly-mined silver, making it likely to become the second-largest producer in the world.

Analysts expect demand for silver in the mainland to grow in the coming years, driving up the global price. Silver is now relatively cheap. During the course of history, one ounce of gold has been worth, on average, about 16 ounces of silver. On January 15, one ounce of gold could buy about 54 ounces of silver.

If gold were to remain at US$1,680 (MOP13,440) an ounce, its price on January 15, and the ratio of the price of gold to the price of silver were to return to its historical average, silver would fetch about US$105 an ounce, or 235 percent more than it does now. If one ounce of gold was worth 10 ounces of silver, silver would fetch US$168 an ounce.

Given the fundamental supply and demand, silver looks set to leap in price. It is likely to outperform gold in the next 10 years, since the market for silver is smaller, making it more volatile.

For centuries our ancestors used silver as currency. Today the metal presents a rare opportunity to make a handsome profit on a medium-term investment.

The views expressed here are those of the author and are not investment calls by Macau Business