The silver price should be soaring – so why isn't it?

Silver boasts promising fundamentals and vast scope for price rises. Nevertheless, it has failed to fulfil its potential. There is no metal more frustrating for investors, says Dominic Frisby.

A Stack Of Silver Coins

Was there ever a metal with as much potential as silver? On the one hand it's a monetary metal, so its price will rise for all the same reasons that gold's will. Currency debasement, suppressed interest rates, inflation, political instability all should benefit silver. Silver is an asset outside of the financial system. Like gold, it is nobody else's liability.

On the other hand, it's an industrial metal that has myriad uses, particularly in new technology. Its uses will only increase as the world gets more "electronic". Computers, mobile phones, batteries, cars, engines, media storage, engines, explosives, plastics, cameras they all require silver.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

New uses for silver are being discovered

New discoveries are being made all the time about its ability to combat infection, fungi, bacteria and even bad smells. As a result, demand is increasing from medicine, biotechnology and clothing. The metal is used in everything from treatment of warts and bad breath to purifying water. It is also an ingredient in hospital paint. Coating walls with paint containing silver particles should help fight infection.

There is also a particularly exciting source of demand, as far as potential growth is concerned: solar power. Demand for silver on photovoltaic cells has gone from one million ounces in 2000 to around 50 million ounces last year about 5% of silver's annual supply. Assuming solar power usage grows, demand for silver will increase. Then there is jewellery and demand from investors. These two areas jointly accounted for roughly 400 million ounces last year.

Advertisement - Article continues below

At the same time there could be a shortage of supply. About 80% of silver's billion-ounce annual demand comes from mining, the rest from scrap. There has been a paucity of major new discoveries. Many of the pure-play silver miners have struggled to make money in recent years and investment in exploration is minimal.

Meanwhile, a great deal of silver is produced as a by-product of lead and zinc mining, another area where investment has disappeared. Silver runs an annual supply-demand deficit. There has been a surplus in only one of the past five years. Last year's deficit was 30 million ounces.

Silver is in the bargain basement

What's more, silver is cheap. At $17.50 an ounce, silver now sits some 65% off its all-time high of $50 (set in 2011). And it's not just cheap when looked at in absolute terms. Relative to gold, it is cheap. One ounce of gold is 85 times the price of an ounce of silver. A geologist will tell you that ratio should be closer to 15: there is only 15 times as much silver in the earth's crust as there is gold. Indeed, 15 is the historical monetary ratio between the two. Even in recent decades, with silver's monetary status long gone, the long-term average sits closer to 50 than 85. Sell gold and buy silver is the message.

Relative to other assets, such as the stockmarket, silver is cheap too. If silver returned to its long-term average ratio against the FTSE or the Dow in other words, if there was some kind of historical reversion to the mean then silver would have to rise to the $50, $100, or $200/oz regions.

In 1980 you could buy the average UK house (currently over £200,000) for about 1,000 ounces of silver (currently $17,500). Silver would have to rise 15-fold to something over $200 for that particular ratio to be achieved again. In short, what's not to like? Silver seems to have so much going for it.

Every silver lining has a cloud

I'll tell you what's not to like: silver. The silver story has been about for as long as I can remember. It just never seems to deliver on its potential; not for any extended period anyway. For years it doesn't move, or worse, it sinks.

Advertisement - Article continues below

Then, no doubt at the one time you're not invested, it suddenly goes on a bull-market run to $50 or something, before collapsing and doing nothing for another ten years. Don't own any silver and you are doomed to watch it rise. Own it, however, and you are doomed to watch it slide and stagnate.

It's supposed to give you leverage to the gold price. But sometimes gold goes up and silver doesn't move. Other times it takes your breath away. There is no metal more frustrating than silver. Bipolar silver.

I'm surprised the ancient Greeks don't have a myth for the frustrations born out of investing in silver. Silver 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. 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.



Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020

Diamonds lose their shine for investors

Diamond miners are in dire straits. The $90bn market is being squeezed by demand and supply problems and faces a long-term threat from manufactured ge…
6 Dec 2019

Buy gold coins, get the history for free

Gold has been a popular store of value for millennia. As a result, coin collectors can bag a tiny piece of history for little more than the price of i…
20 Nov 2019

Most Popular

Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
UK Economy

Britain’s economy might spring a surprise on the doomsayers this year

The UK economy is looking pretty good – we’re more at risk of a boom than a bust, says John Stepek. Here’s why, and what it means for your portfolio.
20 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020