Taking a shine to silver

Experts agree a silver shortage is upon us as its safe haven status and industrial uses gain appeal 

Luke Jackson 700

Precious metals have long been viewed as safe haven assets, providing balance to investment portfolios. Obviously, gold is already established as a common retail investment but silver is now in focus. With its many industrial uses, silver can outperform when economies return to growth as well as providing essential hedging in downturns.

When confidence in central bank-issued fiat money (money that derives its value from the state/government) begins to fade, investors look for secure stores of wealth. They run to gold and also to silver; especially in the US.

Historically, the ratio between the gold and silver price has been about 12:1. This means it took 12 ounces of silver to buy one ounce of gold. The ratio is now closer to 60:1, which defies the relationship that the two metals have had over the last 100 years and suggests that silver could be massively undervalued.

Demand for silver is surging owing to its combined appeal as a tangible safe haven asset and its various industrial uses. Many analysts and geologists agree – a silver shortage is upon us.

According to metal experts, despite the lack of global stockpiles, new technology will continue to discover more industrial applications for silver, putting a further strain on world supplies. The Silver Institute predicts silver demand for industrial purposes will have increased by 36 per cent by 2016.

Silver is very much desired for its aesthetic value too. Burgess reported that 28 per cent of jewellery suppliers saw silver sales increase by 25 per cent from 2009 to 2010.

For these reasons, silver has solidified its position as a major necessity and a highly desirable one as well in the industrial realm. The dramatic shift in the silver supply-demand curve in the past few years has led to it fast-becom-ing a top-asset choice for cautious investors.

Investors in silver are usually looking to capture three key investment benefits:

1: Capital preservation & inflation hedging Huge levels of sovereign debt and paper money printing has significantly devalued traditional currencies. Physical precious metals such as silver provide an alternative store of wealth. Political unrest
in various global regions, most notably currently in Ukraine, threatens the stability of investment markets, with investors fleeing to precious metals to protect their wealth.

2. Diversification Owing to the safe haven nature of precious metals, silver can provide essential hedging and balance to a mixed pool of assets. An allocation to silver can enable an investor to increase their risk appetite in other asset classes while maint-aining the same overall level of portfolio risk. Owning silver physically in the form of bars or coins provides additional diversification from traditional paper assets which have come under threat from the global downturn.

3. Capital growth Silver has exploded in the precious metals market, especially after the financial meltdown in 2008. In 2009 alone, silver investment increased by 184 per cent. In several of its uses, such as medicinal and photographic applications, the silver is expired. This means the total amount of silver available in the world reduces each day. It is easy to understand why the potential for capital growth in silver is significant.

Of course, investing in silver is not without its risks. The price of silver can fall as well as rise and can be volatile in the short term. Investors should view silver as a medium to long-term investment to ride out any price volatility and past performance is not necessarily a guide to future performance. 

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Meanwhile, the cost of storage and insurance needs to be considered when purchasing silver bars or coins. Owing to being more affordable, owning silver will take up more space than owning gold and therefore storage costs can be higher. Investors should have their bars or coins stored in a specialist facility in a segregated manner, so their assets are ringfenced.

Also, the base currency for silver is the dollar. Therefore, any UK investors are exposed to the currency fluctuations.

Retail investors can gain exposure to silver by purchasing physical silver bullion, buying shares in an exchange traded fund a traditional silver fund or silver mining company or riskier options such as spread betting, futures or contracts for difference.

ETFs, traditional silver funds, mining companies, spread betting, futures and contracts for difference all carry additional risks. This undermines the reasons for owning silver as a crisis hedge or as portfolio insur-ance in the first place. These instruments are more suited to short-term speculation than long-term stability and growth.

34% The Silver Institute predicts silver demand for industrial products will have increased by 36% by 2016.

Key takeaway

Silver provides diversification and a hedge against mainstream assets. For long-term stability and growth physical silver should be considered the most secure store of wealth.

Luke Jackson is investment analyst at Intelligent Partnership