The bullish case for silver
When we take a step back and analyze the catalysts behind the move higher in precious metal spot prices, it's silver that could have considerably more upside than gold. Today, we'll lay out the case why physical silver could be on its way to $30 an ounce, which would represent a gain of nearly 60% from where physical silver is today.
According to the World Silver Survey 2016, published by the Silver Institute earlier this year, total supply in 2015 worked out to 1.04 billion ounces, but demand increased year-over-year by 39 million ounces to 1.17 billion ounces. This works out to a physical deficit of roughly 130 million ounces of silver, which represents the second-largest deficit since 2008.
The report notes that demand for silver in solar panels (silver is an excellent conductor of electricity and heat) grew by 23% year-over-year to 77.6 million ounces, with investor demand for bars and coins surging by more than 56 million ounces to 292.3 million ounces in 2015. Demand from the jewelry and silverware industries also improved modestly.
With total physical demand for silver having grown by 17% since 2012, and silver prices having fallen by nearly half over that time span, it's not surprising to see silver prices enjoying what appears to be a demand-driven rebound. As long as the physical demand for silver continues to rise, silver's spot price should have plenty of support and reason to head higher.
Low opportunity cost
Another factor working in favor of silver (and gold, for that matter) is the low opportunity cost trade-off between precious metals and interest-bearing assets. "Opportunity cost" means putting your resources into one asset and thus sacrificing the chance to potentially earn better returns elsewhere.
If we look back a little more than a decade to when banks' CDs and U.S. Treasury yields were paying out 5% or more, it would have been tough to convince investors to give up that near-guaranteed rate of return to instead buy silver, which has no dividend yield.
Today, however, the tables are turned. Bank CDs, Treasury yields, and savings accounts are all yielding very low rates that in some cases are lower than 1%. With return rates this low, investors could actually be losing purchasing power relative to inflation, even if they're logging nominal gains from an interest-based investment like a CD or bond. Buying silver in a low interest rate environment means investors aren't giving up very much in the way of opportunity cost since buying a CD or Treasury bond could cost them real money when inflation is factored in.
As long as the Federal Reserve continues to walk on eggshells with regard to interest rates, silver should remain a popular investment option among investors.
Closing the gold-to-silver gap
Turning to a slightly more psychological factor, I'd point to the gold-to-silver ratio as an important reason why physical silver could outperform going forward.
Generally speaking, physical gold is a considerably more liquid asset, with fewer dollars flowing into physical silver investments relative to gold. What this does is make physical silver more volatile than gold. This means silver often outperforms gold when times are good, and tends to substantially underperform gold when the fundamentals have turned against the industry.
Throughout the entirety of the 20th century, gold's per-ounce price was an average of 47 times that of silver's per-ounce price. More recently, with gold at $1,315 an ounce and silver at roughly $19 an ounce, the gold-to-silver ratio has been about 69. If silver were to simply narrow this difference and return to its 20th century average, this alone would move silver up to $28 an ounce.
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