Why silver, why now? Here are five reasons

Silver bulls still have lots of compelling arguments for a continued rally in prices. Here are five reasons to invest in silver now.

Silver’s allure and extreme volatility have earned it a rather disconcerting nickname: the Devil’s Metal. On Monday, silver’s price briefly surged over $49 an ounce putting it within $1 of a 30-year-high. A few hours later, the white metal had shed 8 percent – plunging by more than $4 an ounce.

Not everyone’s ready to toss their silver positions overboard, though. Silver bulls still have lots of compelling arguments for a continued rally in prices. Here are five reasons to invest in silver now:

1) The ultimate hedge against inflation. This is one of the hardest things to convey to non-investors, but the past has shown us that precious metals act as a store of value during inflationary periods. Here’s how it works: since the dollar is no longer on the gold standard, it’s subject to supply and demand just like any other asset. If you increase the number of dollars in circulation, the value of existing dollars falls.

Let’s say you have $1,000 in the bank, and inflation is growing at 10 percent a year (which it is currently is according to Shadowstats.com). At the end of a year, your dollars are actually worth 10 percent less than they were at the beginning of the year. The number written on the bills hasn’t changed, but the amount of milk or gasoline or the number of Oreos you can buy with that $1,000 has certainly changed.

Now, let’s suppose you’d sunk your $1,000 into silver coins on Jan. 1. By the end of the year, you could sell those same coins for (in theory) $1,100 and buy the same amount of milk, cookies and gasoline you could have at the beginning of the year.

That’s a highly simplified example. Last year, for instance, silver appreciated 80 percent in nominal terms. That means your $1,000 would have been worth $1,800 by the end of the year. It wouldn’t have acted solely as a store of value, it would have grown, too. Call it the miracle of finite commodities.

When you print a limitless supply of dollars, your actions aren’t impacting the finite world of silver. That means as the supply of dollars increases, their value goes down. Silver, on the other hand, can’t be mass produced in a laboratory, so its prices aren’t subject to the whim of the Federal government.

2) The historic gold:silver ratio. Precious metals investors closely watch what’s known as the gold:silver ratio. It’s found by dividing the current price of gold by the current price of silver. As of this writing, for instance, gold’s trading at $1,497 an ounce and silver’s at $44.91 for a ratio of 33:1. In other words, it would take 33 ounces of silver to buy one ounce of gold.

Depending on your time frame, the historic gold:silver ratio could be anywhere from 10:1 to 70:1. Over the past 100 years, the ratio has hovered close to 65:1. In centuries past, that ratio was much lower – somewhere around 16:1. That’s pitted two different types of silver investors against one another: those who use modern history as a scale for the gold:silver ratio and those who look at things over a much longer time horizon – say over the past 1,000 years.

Nick Barisheff president and chief executive of Toronto-based Bullion Management Group argues that silver has historically traded at a ratio of 16:1 – a number that’s roughly equivalent to the ratio of silver to gold in the ground (per the Toronto Sun). “In terms of that ratio, silver should be twice the price that it is,” Barisheff tells the Sun.

3) Industrial demand. Unlike gold, which is primarily used in jewelry and as a monetary metal, silver is used for a wide range of industrial applications. In 2010, industrial demand for silver climbed above 487 million ounces, according to the Silver Institute. That accounted for nearly half of the worldwide supply of 1.05 billion ounces. Silver is consumed by industry for use in batteries, bearings, soldering, electronics and catalysts. In addition, a number of new and emerging uses for the metal prove promising in diverse fields from medical applications to solar energy and water purification.

4) Volatility is your friend. If you believe in the underlying argument for higher precious metals prices, silver will give you more bang for your buck than gold in the event that you’re correct. Because the silver market is smaller and more liquid than the gold market, its price can swing aggressively. Where gold goes silver does, too, but it does it faster. The trade off is a greater degree of risk. If you can stomach the powerful price swings, you’ll probably make more in silver than you would investing in gold.

5) The high cost of mining. Most of the silver that’s mined from the earth (about 70 percent of it, in fact) is mined as a by-product of mining for other metals. Even with silver trading over $45 an ounce, that’s not quite enough to bring costly, full-scale silver mines into production. That means we probably won’t see a large influx of fresh silver production hitting the market anytime soon – even in the face of rising demand. Without more supply to meet growing demand, prices have just one direction to move; and that’s up.

Related

BLIND LEADING THE BLIND


Why has the media gotten silver price forecasts so wrong?


GOLD’S TURN TO SHINE?


Gold silver ratio pointing to higher gold prices?


SOCIAL NETWORKING WAR HEATS UP IN CHINA


RenRen IPO’s biggest hurdle might be PengYou


ARTIFICIAL MARKETS


Silver market manipulation can’t be ruled out


THE SIMPLE WAY TO HOLD PHYSICAL GOLD AND SILVER


Top 10 best gold and silver ETF funds

THE FACEBOOK OF CHINA?


3 MORE reasons to invest in the RenRen IPO