Like gold, silver is money. It is also an irreplaceable industrial metal; however, unlike gold, silver is used up in the many processes for which it is essential. Silver’s industrial applications are growing on a daily basis in order to keep pace with rapid developments in technology.
Geologically, silver occurs in larger quantities than gold, and is therefore easier to mine: it remains where it is formed, whereas gold travels through water and seeps into deep veins. Silver also has a lower melting point than gold and is easier to refine, yet silver shortages are becoming greater than gold shortages because of a number of unique conditions silver faces today.
In 1980, even with the silver price at a historical high, 4 billion ounces of aboveground silver existed. Today, because of silver’s dual role, only 1 billion ounces exist.
1. Silver has a Historic Role as a Monetary Metal
Silver, like gold, is a monetary metal and a safe haven, and it cannot be debased like modern fiat paper and electronic currencies. Throughout history, silver has been used as money in more regions and countries than gold. Like gold, silver meets the criteria for universal money: it can be easily divided into equal parts, it is found worldwide and it is extremely durable.
2. Silver is Undervalued
Silver remains historically undervalued, even more so than gold. In 1980, when record amounts of silver were stockpiled, the gold:silver ratio was 16:1. Currently the ratio is fluctuating between 30 and 55. At a 16:1 ratio, silver today would be over $100 an ounce when compared to the price of gold.
3. Silver’s Short Position
One of silver’s most unique features is its disproportionately large short position on the COMEX that has yet to be covered. Although “commercial traders” in most markets are commercial producers who wish to guarantee a fixed price for their corn or their copper, in the precious metals markets, bullion banks hold the largest short positions.
Currently, the COMEX short position of the eight largest traders represents one-third of the total one billion ounces of aboveground silver bullion in existence.
4. Silver Used in Industrial Processes
Silver has industrial uses that no other material can replace. It is malleable and ductile, and is capable of being formed into fine jewelry, hammered into thin sheets and extruded into microscopically thin wires. It is a superior conductor of heat and electricity. It is highly reflective, which is why it is used in mirrors. It also has antimicrobial properties that make it ideal for surgical applications, and as an additive to everything from paint to clothing.
5. Silver Demand
Because of its dual role, silver has never faced greater demand than it does today. In 2010, total fabrication demand grew by 12.8 percent to a 10-year high of 878 million ounces, and use in industrial applications grew by 20.7 percent to 487.4 million ounces.
6. Silver Supply
Although silver mine supply rose by 2.5 percent to 735 million ounces in 2010, the yearly amount of mined silver has been less than demand for the last 15 years. There are very few pure silver producers; 20 percent of silver is mined as a by-product of other metals.This could be problematic in the event of an economic slowdown. Currently Mexico leads the world in silver production, followed by Peru.
We can see that silver has the monetary properties of gold combined with strong and growing industrial uses. These attributes make it the perfect complement to gold to hold in a portfolio.
