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Why Are Investors so Bullish on Silver?

A lot of people seem to be trying to find reasons to buy silver.

In fact, there appear so few detractors that you wonder why it isn’t already at $50 per ounce. The main argument against that appears to be the not-unreasonable position that silver consumption is nearly 50-percent industrially dependent.

Silver Demand in 2011
Source: Silver Institute

So with industrial growth slowing in Asia and heading into reverse in Europe, what hope is there for industrial consumption? Not so fast — supporters counter this with a range of counterarguments.

The first is that industrial activity may be heading into recession in Europe, but elsewhere it is showing moderate growth, which forms a positive platform for demand from jewellery and investment to build.

But jewellery demand hasn’t been as strong during last week’s Diwali festival in India as some had hoped.

Early reports range from “no demand and dull” – the Bombay Bullion Association quoted in the Indian Economic Times — to “silver has proved to be the preferred substitute to gold with most retail buyers this Diwali”; the latter from Manish Mehta, a bullion retailer quoted in Stockinvestor.

It may be too early to judge, but the consensus suggests that while cosmetic jewellery demand may have been quiet, investor demand for coins and commercial gifts has been more buoyant.

Indeed, investor appetite appears to be the most positive driver of silver demand, but if it isn’t due to rising industrial or jewellery consumption, where is this enthusiasm coming from?

In large part, it seems to be coming from the gold-silver ratio.

There are many situations in which gold-silver ratios are assessed, such as naturally occurring (as ores in the ground), total quantity ever mined ratios, and ounces held in investments ratios; but the most important is the price ratio.

In large part, investor enthusiasm seems to be coming from the gold-silver ratio.

There are many situations in which gold-silver ratios are assessed, such as naturally occurring (as ores in the ground), total quantity ever mined ratios, and ounces held in investments ratios; but the most important is the price ratio, which for the last few years has trended between 45 and 60.

That is, one ounce of gold is usually worth between 45 and 60 ounces of silver.

It has been as high as nearly 76 during the 2008-09 crash, but currently stands at 53.

The argument goes that whenever the ratio indicates that there are too few ounces of silver for one ounce of gold, you know that silver is overpriced relative to gold and might fall. If the ratio indicates too many ounces of silver for one ounce of gold, silver is clearly too cheap and will rise to its real value. In short, once you know the normal range, you can predict how much room remains for both metals to move, even if all other factors remain the same.

Traders who swear by the ratio are therefore currently buying silver and selling gold because they believe silver will give them higher returns than the yellow metal, for now. The same argument was used to very good effect in the platinum-gold ratio recently making investors who spotted the divergence a handsome return within days.

Central bank quantitative easing is supposedly good for gold as well as silver. Gold bugs are certainly expecting the price to rise, but the leveraging effect would mean silver prices should in theory move even faster if the current ratio is maintained.

Although some chartists are suggesting silver prices could hit $165 per ounce by 2015, most analysts are more cautious.

Philip Klapwijk, executive chairman of GFMS is quoted as predicting $40-45 per ounce next year, possibly $50. That would require both a further rise in gold and a drop in the ratio towards 45…

How brave are you feeling?

By. Stuart Burns


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Leave a comment
  • Gordon on November 22 2012 said:
    No mention that joe and josephine six-pack (Internationally), unable to afford gold, may be stacking some silver as a hedge against the continual and even rampant destruction of their respective currencies by their power-mongering governments.
  • Johnny Dangereaux on November 26 2012 said:
    A quaint little piece. No mention of the long term historic ratio of 16:1...very close to the amounts found in the Earth's crust I hear. Also, that was the Ratio set by the Coinage Act of 1792 don't ya' know!
    There is more known Gold above ground than Silver some say...what would be the ratio then? How about a target of 5:1 -to be conservative.
    Mark my words...Silver will be $1.50/toz after it's all said and done,
    JUST LIKE IN 1964...now what that buck and a half will buy, i
    s another question! Haha!

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