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Silver Is Shaping Up To Be The Best Precious Metal Play Of The Decade

Though silver is right now bearish, the white metal continues to offer considerable long-term potential upside. The gold-to-silver ratio indicates that silver is significantly undervalued in comparison to gold. Increasing industrial demand, particularly for solar and hi-tech application, will exacerbate the supply shortage, driving prices higher.

Silver has been trapped in a severe bear market for the last three years, with it still down by a massive 61 per cent from the ten-year high of $48.70 per ounce hit in April 2011. Recently, silver has rallied, recovering by almost 11 per cent from its 52-week low to now be trading at around $17 per ounce. While this rally increasingly appears to be short-lived, there are a number of catalysts that indicate a favorable long-term outlook for silver.

Gold-to-silver ratio

The gold-to-silver ratio reflects the correlation between silver and gold prices, allowing investors to determine when it is the optimal time to invest in silver in preference to gold. The gold to silver ratio has widened considerably in recent years. At the height of the gold bull market which peaked in 2011, 38 ounces of silver bought one ounce of gold. This has now more than doubled, with 71 ounces of silver needed to buy an ounce of gold.

The current ratio is also well above the historical average, which over the last century has required somewhere between 50 to 60 ounces of silver to purchase one ounce of gold. Over the last two decades the ratio has averaged 60 ounces of silver to one ounce of gold. While the ratio of silver to gold in the Earth’s crust is estimated to be between 17 ounces to 20 ounces of silver to one ounce of gold. This indicates that silver is heavily undervalued in comparison to gold and that now is the optimal time to invest in silver.

If the ratio were to fall to where it was during the height of the gold bull market, silver based on current prices would need to appreciate by around 86 per cent in value. While if it even returned to the historical average of 50 ounces of silver to one ounce of gold, it would need to appreciate in value by 41 per cent, still offering considerable potential upside to investors. However, investors should remember that in comparison to gold, silver is far more volatile because of far lower market liquidity coupled with fluctuations in demand for industrial uses, the fabrication of jewelry and as a store of value.

Growing demand

Silver is an industrial metal with a wide range of uses, primarily because of its conductive properties, with it being the most electrically conductive element followed by copper and gold. This sees it in great demand as a component in a range of industrial applications and hi-tech products. For 2014 alone, industrial demand for silver made up 56 per cent of its total demand and industry has been the primary consumer of silver for some time.

This compares to gold where industrial demand only made up 8 per cent of total gold demand in 2014, with the largest driver of demand being for investment purposes. However, when we take a deeper look at the numbers it can be seen that demand for silver in a range of industrial applications continues to grow. Silver has become an integral component in a range of hi-tech applications including flexible touch-screens, semi-conductor stackers and light emitting diodes (LEDS). Demand for these components is set to grow exponentially over the coming years as their use in portable consumer electronics, medical and other applications continues to rise. Over the last ten years the demand for silver for use in electronic and electrical applications has grown by 15.

Between now and 2018, annual silver consumption for use in flexible electronics is forecast to grow tenfold, by up to 2 million ounces. Meanwhile, industry insiders expect the demand for silver in the manufacture of LEDs to shoot up to 8 million ounces annually and 10 million ounces for use in semiconductor stackers. This represents a total of an additional 20 million ounces of silver annually being used in the manufacture of these components. Declining silver supplies, the growing demand for silver for use in the manufacture of these hi-tech components will add further pressure to an already constrained supply situation.

According to the Silver Institute, demand for physical silver in 2014 outstripped supply by half a percent, or 4.9 million ounces, and this physical supply deficit can only get worse. For 2015, it has been estimated that supplies of physical silver will decline by around 3.5 per cent, primarily because of falling supplies from mining. This is because silver miners have sharply decreased investment in exploration and mine development because of markedly weaker silver prices, that have made many ore deposits uneconomical to mine.

Such a sharp decline in investment in exploration and mine development will have a long-term impact on silver supply because there is a long lead-in time associated with identifying and exploiting new ore deposits, as well as with ramping up production from existing mines. Clearly, the fundamentals are in place to support a solid rebound in silver, although it will take time for this rally to occur with short-term volatility set to remain a characteristic of silver prices for the foreseeable future.

Courtesy : seekingalpha.com