Whenever an asset endures a hard sell-off, my interest is piqued. Exceptional values are frequently found after most investors head for the hills.
Today, I see an exceptional opportunity in silver. In fact, i think that silver is better than gold. For the past two years, selling has been relentless. Today, silver sells at a 50% discount to its multi-decade high of $49.80 an ounce set in April 2011.
But price doesn’t automatically translate into a good value. I find silver attractive because of its low price relative to my bullish long-term outlook.
Why am I bullish on silver? Several reasons…
A key reason is that demand for silver’s “moneyness” will remain elevated. I say that because silver is a store of value. That’s an invaluable characteristic in this inflationary environment.
The Federal Reserve continues to pump new money into the economy. Each new dollar diminishes the value of each outstanding dollar. Once the Fed starts tapering, these dollars aren’t going away.
Perhaps more importantly, banks have $1.8 trillion in excess reserves (banks usually carry no excess reserves) on deposit with the Fed. These reserves are a source of loanable funds, which can lead to new money production many times beyond the actual reserve account.
Silver, therefore, will continue to hold demand as store of value.
If you agree with my outlook, you’re probably wondering why I recommend silver instead of gold? After all, gold also has “moneyness” and is used as a store of value. And it too has experienced a hard sell-off.
I prefer silver for two key reasons.
First, the sell-off in gold has been less small. Sure, gold is down around 27% from its all-time high of $1,921 an ounce. Yet silver has plunged 50%.
In addition, the gold-to-silver ratio remains elevated at 58. That means it takes 58 ounces of silver to buy one ounce of gold. The average long-term range is between 65 and 45, making silver is the better value today.
And second, silver offers an option on economic growth. Unlike gold, silver is an important commercial metal.
Of all metals, silver conducts heat and electricity best, making it ideal for use in high-performance electronics. As a result, silver is finding its way into more computer and cell phone components.
In addition to electronics, silver’s use in solar panels is increasing at a rapid pace. In 1999, solar technologies used virtually no silver. Yet last year, solar consumed more than 60 million troy ounces. Consumption is projected to increase annually to 80-to-100 million troy ounces over the next decade.
Silver is also gaining popularity as an anti-bacterial agent. As bacteria grow increasingly resistant to medications and new pathogens invade hospitals, more pharmaceutical companies are turning to silver.
Silver demand in industrial applications will pick up when economic growth picks up.
Silver Demand By Use
So the long-term silver outlook is positive, but there are near-term difficulties. After all, an asset doesn’t lose 50% of its value if something isn’t amiss.
Something is amiss. Last year, silver demand was down in all fabrication categories – coins, silverware, jewelry, photography, and industrial. At the same time, silver supply increased 4%.
The reason for the decline was a global economic slowdown. Data from the World Silver Survey show overall silver demand for industry, jewelry, photography, silverware, and coins fell 7% last year.
Economic growth remains sluggish today, so silver demand remains subdued. At the same time, silver production is expected to rise. Forecasts from Reuters/GFMS show silver production exceeding 25,000 tonnes, an increase of 1.6%.
Today, I believe the low demand for silver is appropriately reflected in the price. After all, that’s why silver has fallen 50% from its highs. Demand for silver will return, and when it does, the price will rally.
The iShares Silver Trust (NYSE: SLV) is an ETF that tracks the price of silver. It’s an easy and low cost way for investors to add exposure to silver in any brokerage account.
Buy Gold for $400 an Ounce
Most gold miners are lucky to get their gold out of the ground for less than $1000 an ounce – which is great if gold is $1400 or more…But we found a specialized gold company that can buy gold for $400 an ounce. It’s a unique story – a safe way to benefit from high gold prices, with lots of downside protection. Click here for the full write-up.