Silver’s a better investment than gold. Here’s why

“Do you think I am beautiful, V?” she asked one morning, as I sat drinking my cup of coffee.

“What is it about the rain that makes women ask crazy questions?” I wondered, but obviously didn’t say it aloud. “Is that a trick question?” I asked back.

“Answer me,” she said.

“Let me paraphrase what I read in Serious Men, a book  by Manu Joseph recently. “Beautiful women depress me. They are like Mercedes, Blackberry phones and sea-view homes.””

“So you don’t think I am beautiful.” she concluded.

“You are the way you are, and to me, that is good enough,” I said.

She sighed. We had had this conversation earlier too, and I had refused to be drawn into such debates. “Okay, tell me what you think of these silver earrings?” she asked, opening a small box and handing it to me.

“Well, for starters, they are not gold. Since when did women start buying silver jewellery? I thought women always considered that “junk” jewellery.”

“Just for a change.”

“Means you felt like buying earrings and did not have enough money to buy gold earrings,” I said.

“You could say that,” she said, with a wry smile on her face.
“And it may not be such a bad investment decision either.”

“Investment decision?”

“Well, if some analysts who follow silver closely are to be believed, silver is on its way to becoming extinct. In fact one of them, Adrian Douglas, predicts silver will become extinct by 2020.”

“But how can a non-living thing become extinct?” She asked, a puzzled look on her face.

“We will come to that soon, my dear. First, let me explain a few other things. Silver has by far more varied industrial applications than any other metal.”

“Why is that?” she interrupted.

“Theodore Butler, a well-respected silver analyst, said in an interview sometime back, “silver is the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvelous lubricant and a versatile catalyst and alloy.” And all these qualities ensure that silver has lots of industrial applications,” I said.

“So what kind of industrial applications does silver have?”

“It is used widely in low-technology as well as high-technology manufacturing — in low-tech manufacturing, it is used in

soldering, making mirrors, photographic films and different kind of electronic items. In high-technology, silver is used in generation of solar energy, making bearings and next-generation batteries, and even in purification of water. In fact, more new patents are filed on silver than any other metal, that’s its level of its industrial use. In fact, silver also has very good anti-bacterial qualities. Jeff Nielson, editor of www.bullionbullscanada.com wrote in a recent piece that “silver is unique in possessing chemical properties which make it impossible for bacteria to reproduce… look at the use of silver in polyester sportswear… because of its anti-bacterial properties. However, in this case, the silver kills bacteria not to prevent disease but to reduce odour. It is the bacteria which are contained in our perspiration which are responsible for odour. Kill the bacteria, and you greatly reduce odour.” This is an upcoming area of use for silver and estimates by Nielson suggest it consumes over 38 million ounces per year (one ounce equals 31.1 grams).”

“So there are lots of industrial uses for silver and gradually, these uses are going up. But how does that put silver on its way to extinction? If demand goes up, so will supply,” she reasoned.

“Ahh… if only it were that simple. As Butler says, “Silver inventories have declined from 10 billion ounces in 1940 to 1 billion ounces today. Meanwhile, world gold inventories, including jewellery, have increased from 1 billion ounces in 1940 to 5 billion today.” So gold inventory has gone up over the years whereas 90% of the global silver inventory disappeared in the last 70 years.”

“Disappeared where? Silver is a metal. It can’t just disappear into thin air,” she objected.

“You are right, it can’t disappear into thin air. Take the case of gold. All gold is literally recycled. Take the gold jewellery your mother wants to pass on to you. Say you feel the designs are outdated. So your mother goes to a jeweller and gets new jewellery made from the old jewellery, and thus recycles the gold. This is not always possible in case of silver primarily because silver is used in very small amounts as an industrial metal, and it is not always monetarily viable to recycle it. Also, over the years, the price of silver has been too low and thus, has led to over-consumption, thus depleting inventories.”

“So what’s the real scene, then?”

“Currently, silver is quoting in the range of $18.5-19 per ounce,whereas gold is at around $1185-1200 per ounce. This means gold is around 65 times more expensive than silver. Now, this is a little funny given that gold inventories at 5 billion ounces are nearly five times more than that of silver.”

“But that is just the estimate of one analyst,” she interrupted.
“Fair point. But here’s what Nielson recently wrote: “While no firm numbers exist... estimates I have seen range from there being six times as much silver as gold, while some commentators are maintaining that the amount of available gold in the world now exceeds the amount of silver.” So the bottomline is there is not as much silver going around as the world feels there is.”

“But can’t we produce more?”

“We can, but two-thirds of the silver that is mined comes as a by-product during the mining of other metals such as copper, lead and zinc. So production cannot be ramped up straight away. Data from the Silver Institute suggests silver mine production rose 4% to 709.6 million ounces in 2009. Also, with the future of paper currencies in danger, investment in silver increased by a huge 184% to 136 million ounces in 2009.”

“Interesting. Anything else?”

“The historical ratio of gold-to-silver price has been around 15 to 16 and that has been out of whack for a while now, and needs to correct, which could mean that silver prices will go through the roof and of course, rise faster than the price of gold. Also, silver prices go up, more and more women will want to wear silver jewellery as well. And that should also add to the demand.”

“Hah. So get me a pair of gold-earrings na.”

“Arre after all this talk about silver you still want gold?”

“Yes. That’s the real thing, V.”

“Have you heard this couplet by Gulzar?” I asked. “Aap ki khaatir agar hum loot bhi le aasman, kya milega chand chamkile se sheeshe tod ke! Chaand chubh jayega ungli main to khoon aayega.”

The example is hypothetical

References:
Several articles on silver by Jeff Nielson, published on www.bullionbullscanada.com
The Historical Gold/ Silver Ratio and Why It's Time to Buy Silver, Matthew Green, www.seekingalpha.com, May 25, 2010
World has 5 times more gold than silver, An
interview with Theodore Buttler, March 3, 2009, Daily News & Analysis