Silver: A Metal Better Than Gold

How has the silver price performed? In the last year, it has been one of the best-performing metals and last week reached a six-year high of $7.15 per troy ounce. The silver price broke through $7.00 an ounce for the first time since February 1998, the only other month the metal has traded above this level in 16 years. Silver futures hit a 16-year high of $7.14 a troy ounce. So far this year, silver prices have outperformed gold with a 20% rise, while the gold price has remained more or less flat. But even after its recent rally, silver still trades at a fraction of its all-time high of $48 an ounce in 1980.

Silver: what’s the attraction?

Silver, number 47 in the periodic table, is variously known as the “white metal”, the “poor man’s gold” and – thanks to a reputation for volatility – the “restless metal”. Although relatively scarce, silver is the most plentiful and least expensive of the precious metals. For centuries, it has been valued for its beauty and used both in jewellery and alongside gold as an important store of value. The ancient Greeks used it in the minting of the drachma and the Roman denarius was also a silver coin. But these days, silver has ceased to play any meaningful role in the financial system – the US no longer holds any silver in its central bank reserves – and jewellery use has fallen 7% in the last five years.

Silver: what’s it used for today?

Today, silver is chiefly valued for its physical properties: it is malleable, highly resistant to corrosion, a superior reflector of light and is a superb conductor of heat and electricity. As a result, it is used widely for industrial purposes, ranging from computer chips in mobile phones to defrosters in car windows. Meanwhile, almost a quarter of annual production is used in photographic film and printing paper.

Silver: what is driving the price rise?

Silver bulls say that the recent price rises reflect a long-overdue re-rating of the silver price following a long period of under-valuation. They argue that, since 1900, the ratio of the gold price to the silver price has averaged about 40, but earlier this year had climbed to over 70. Even after the recent price rises, the gold/silver ratio is only 55. Moreover, they argue that a rise in the silver price is justified by fundamentals. According to the CPM Group’s 2003 silver study, demand for silver has outstripped supply for each of the last 14 years. The shortfall has been made up from existing stores of mined metal. But inventory levels are now down to less than 400m ounces having fallen from 2bn ounces in the late 1980s. The bulls say that this is likely to continue.

Silver: why not mine more?

Because pure-play silver deposits are incredibly rare – indeed, only 22 are known to exist in the world. Mexico is the biggest source of silver, followed by Peru, Australia, the US and China. Moreover, about 75% of the world’s silver is something of an afterthought. Miners recover silver as they target higher-profile minerals, such as gold and copper. The silver is sold and proceeds are used to subsidise the costs of mining the target minerals. Swedish group Boliden AB, for example, is primarily a copper and zinc producer, yet last year recovered 600,000 ounces of by-product silver. Since silver has been in the doldrums for so long, there has been little investment in new production in recent years. And even if higher prices made new mines economic, these would take time to come on stream.

Silver: does everybody accept this analysis?

No. Many mainstream commodity analysts think the recent price surge is unjustified. John Reade, precious metals analyst at UBS, says the silver-price rally is being driven by speculators, who had built up long positions in silver futures equal to almost a year’s mine production of supply, which usually indicates rising prices. But Reade says that the underlying outlook for silver is not good, since it faces a decline in one of its core markets: photography. Last year, Eastman Kodak announced plans to scale back its activities in conventional photography to focus more on digital. At the time, the news caused the silver price to slump from $5.30 an ounce to just $4.81 before it rallied to its recent high. “The fundamentals don’t support a price rise,” he told the FT, “but there are plenty of funds buying and no one is going to stand in their way.”

Silver: how will digital photography affect demand?

Most analysts think that demand for silver for photography is bound to decline as the switch to digital photography continues. Demand fell 4% last year, the third consecutive annual decline. On the other hand, it is important not to exaggerate the impact of digital, since even digital photographs need to be developed on silver-backed paper if they are to last. In the meantime, silver continues to acquire new uses – for example, in radiography.

Silver: where does it go from here?

Much depends on what happens in the world economy. The manufacturing boom in Asia is driving up prices of all commodities and so long as it continues is likely to continue to lift the price of silver. On the other hand, silver could also benefit should the economy suddenly take a turn for the worse. One of the advantages of silver is that it combines the property of both a base metal and a precious metal. Should the US recovery run out of steam, triggering a dollar crisis, silver could come into its own as the “poor man’s gold”, functioning in its traditional role as a store of value and as a hedge against inflation.