While gold gets all the attention from the mainstream financial media, silver just lurks in the background, drawing attention mainly from dedicated precious metals investors. Often referred to as “poor man’s gold,” silver’s significantly lower price allows investors to dip their toes into precious metals markets without having to shell out huge amounts of cash. Plus, with so much silver coinage having been produced over the years there’s a much larger variety of silver products out there to choose from.
Silver normally moves in lockstep with gold: when gold rises, silver does too; when gold falls, so does silver. The tremendous growth in gold’s price over the past two decades has therefore been mirrored by a huge increase in the price of silver. But the gold/silver ratio has grown tremendously too. During the days of bimetallism, when gold and silver coins circulated side by side, the silver to gold ratio was around 16:1, meaning that 16 ounces of silver were worth about 1 ounce of gold.
When gold and silver were demonetized in the late 1960s and early 1970s, their prices were free to move on markets, where they broke free of that 16:1 ratio. For quite a while in recent years we saw silver trading between about a 45:1 and a 50:1 ratio, which remained stable for a long time. But now silver has diverged even further, with the ratio currently sitting at around 85:1.
That ratio is ultimately unsustainable and will come back down, it’s only a question of when. Precious metals investors see that ratio and understand that silver is incredibly undervalued right now, which is why they’re in a rush to buy before the silver price rises again. Silver demand increased again last year to a three-year high, with worldwide demand reaching over a billion ounces. Production, on the other hand, fell to 855 million ounces.
Demand has become particularly strong in India, where gold’s high prices have seen many people move to silver as a lower-cost alternative. Silver demand there more than doubled, while investor demand for silver bars worldwide was up over 50%. Industrial demand looks set to boom too, as silver’s use in solar panels will be a huge driver of the silver price in the future. If production continues to fall well below demand then expect silver to surge in the future. That just goes to show that gold isn’t the only metal that glitters.