Silver is looking undervalued

Silver is often described as gold’s poor relation. It remains a classic inflation hedge and safe haven, but also behaves like an industrial metal.

Indeed, well over half of the annual silver supply is now used by industry (in sectors ranging from medicine to aerospace), compared to around 11% for gold. In precious metal upswings, it tends to outperform gold: the “same drivers as gold driving a smaller market ensures that”, says Franklin Sanders of The Money Changer.

Witness the 70% jump in the price to more than $20 an ounce from late 2007 to the spring of 2008. Once sentiment turns, however, silver can tumble rapidly, as seen in the slump last summer when it fell along with base metals. Silver has slid to a three-month low of $12 over the past few weeks, having reached last summer’s level of $14 in late February.

But with financial turmoil looking far from over, investment demand has risen strongly. The amount of silver held in exchange-traded funds has hit an all-time high of over 10,000 tonnes, almost half of annual mining production. Strong investment demand should compensate for slumping industrial demand this year, according to Eugen Weinberg of Commerzbank, who also foresees stagnating mine production.

Silver looks undervalued compared to gold. The ratio of gold to silver is at 73, but has averaged about 65 since the early 1980s. The upshot, says Weinberg, is that silver looks set to average $14 in the third quarter, while in the fourth it could hit $16. For those willing to risk a punt on this extremely volatile metal, there is a London-listed ETF, Physical Silver (PHSP).