Are we near a turning point in silver’s relentless decline?

Silver coins © Getty Images
The investment case for silver remains compelling

Every cloud has a silver lining, runs the old saying. There is an exception to this, however, and that is silver itself. Every ounce of silver has a cloudy lining.

Don’t own any silver and you are doomed to watch it rise. Own it, however, and you are doomed to watch it sink.

There is no metal more frustrating than silver. Bi-polar silver. The metal that doesn’t know if it’s base or precious.

And silver is what we are considering this morning.

Avert your eyes – this is one ugly chart

If there is an uglier chart over the past fortnight or so than silver’s, I’d like to know what it is. Here’s the offending graphic. This one is just relentlessly grinding lower and it can’t find a bid.

Silver price chart

One likes one’s charts to be rising from bottom left to top right. Silver has it the wrong way around.

Its current price is $16.30 an ounce, having been as high as $18.57 just a fortnight or so ago. In 2011 it hit $50, of course. In 2001 you could pay just $4 and get an ounce of the stuff.

The investment case for silver remains as utterly compelling as it has always been. The number of uses for silver keeps on growing, as the world gets more electronic. In other words, demand can only increase.

Meanwhile, new silver discoveries are as rare as a year in the UK when there isn’t some kind of national vote. In other words, supply seems permanently on the verge of drying up.

And yet it never does.

As soon as you start looking at historical charts of silver ­­– in particular the ratios between the price of silver and other assets – your mind starts thinking in terms of some kind of historical reversion to the mean. This would entail silver rising to $50, $100, or $200 an ounce.

In 1980, for example, at one point you could buy the average UK house (currently over £200,000) for about 1,000 ounces of silver (currently $16,300). In other words, silver would have to rise 15-fold – to something over $200 – for that particular ratio to be achieved again.

It’s happened before, so it’s not impossible, but it’s unlikely.

Look at silver as a precious metal, and all the arguments that there are for owning gold apply, only more so. It is an asset outside of the financial system. It is nobody else’s liability. All of this debt is going to lead to some kind of currency crisis. Monetary metals are going to go to the moon. If gold goes up 10%, silver will go up 30%. You get so much more leverage.

And so on.

Look at silver as a base metal, and the arguments for owning it remain manifold. Uses for silver keep on increasing, whether in electronics or in medicine, in batteries or in jewellery. If you’re bullish on tech, own silver. If you’re bullish on the rise of the new Asian middle class, own silver.

The investment story of silver is like something out of an Ancient Greek myth. It is doomed to be compelling, alluring, irresistible and beautiful. It is doomed to entrap you with its vast potential. Yet, once trapped, you are doomed to disappointment by its never-ending failure to deliver.

However, having properly put the boot in, I have some good news of sorts for you.

A glimmer of hope

The following chart shows the ratio between the gold and the silver price since 1985 (I’ve used 1985 as a starting point deliberately so as not to blur our vision with the madness of 1980).

Typically, and especially so over the last 20 years, when that ratio goes above 80 – in other words when an ounce of gold is 80 times as expensive as an ounce of silver – that has marked a “buy” point for silver.

 

Gold/silver price ratio chart

Gold is currently 75 times the price of silver, so there is still some way to go before we hit that target. But the current price action is such that it wouldn’t surprise me if that target were to be reached over the next few weeks. Perhaps we’ll see gold at $1,200 and silver at $15, for example. (That is just me guessing, by the way. Please don’t take those numbers too literally.)

I made this same point last year when the ratio between the two metals was at a similar level, and silver went on to enjoy a nice run. Like all things silver, it was doomed to disappoint. Instead of going back to the 50 area, when the ratio got to about 66, it turned and went back up again to where we are today.

But when the ratio hits 80, the trade is to sell gold and buy silver. When it goes below 50, it’s usually time to start thinking about the reverse trade – buying gold and selling silver.

And that ratio will go below 50 once again. But you can expect plenty of frustration and disappointment before it does so.

  • Peter Edwards

    I have been waiting patiently for silver to hit single digits.

    I think your ratio to gold of 80 seems a better entry point.

  • dfjkbvdjkf

    The problem with this discussion is that it is only academic. In the real world Silver and Gold in their physical form are terrible investments.

    Take Silver, for example. If you are inspired by this piece and fire up the internet to go and buy some silver, the first thing that happens is that you get charged VAT (20%) on the bar that you wish to purchase. Either that or the merchant requires you store it in their VAT-free vault at something like £100 per year.
    So you look at coins, which all have large banners on the web page saying they are VAT-free. And they are, in theory. But then you whip out your calculator and realise that the cost of a 1oz silver coin is actually 20-30% above the market price for the metal. That is even worse than the cost of the tax on bullion bars. VAT free, but with a whopping overhead instead. So in both cases you lose a packet when you come to sell.

    And as far as selling goes. You are unlikely to be able to offload your stash just by selling it locally. No jeweller would touch precious metals that just come in off the street – not at “bullion” prices, though maybe as scrap. The chances that the coins were stolen (receipts and certificates being easy to forge), the chances of it being part of a scam, debased (not of the claimed purity), fake or as a sting by the tax authorities make the risk just unacceptable. So you can generally only sell back to the outfit you bought from – and at the price they will give you.

    Articles like this should go to more effort to inform casual investors that they are referring to alternative types of investing, not to buying and selling physical metal, over the counter.