Why Buy Silver?
As a precious metal, silver ranks second only to gold for its ability to captivate the imagination. For at least four millennia of recorded history, silver has been prized as a store of value and used as money, as well as admired for its beautiful properties. Silver is an ideal metal for creating exquisite and desirable jewelry and beautiful ornamentation. Silver’s desirable aesthetic is not the only factor that drives the modern silver market; the market price of silver is determined by many factors, including a continued demand for silver in industry and technology. Let’s take a look at some of these factors to better understand the silver spot chart above.
How Is Silver Priced?
In the silver market, a number of factors interact with supply and demand to determine silver prices. All of these factors are in constant flux, and the interaction of these forces creates the current price of silver.
London Silver Fixing
At any given time, any company or individual buying silver will check the current spot price. The London Gold and Silver Fixings have served—since 1897 for silver and 1919 for gold—as the benchmark prices for trading in these precious metals. Historically, selected participants (generally well-known banks) in the silver and gold markets meet and evaluate the market. Looking at the current price, they determine whether that mark should be maintained, lowered or raised to ensure all orders in the market will be filled for both those selling silver and those buying silver (or gold).
Futures and OTC
Today, however, the London Fixing is only part of the equation in evaluating silver prices. Trading in futures of silver and the Over-The-Counter market play a central role in determining moment-to-moment spot prices. Futures represent the price someone will pay for an ounce of silver at some specific time in the future, and an Over-The-Counter market is a decentralized market in which dealers act as market makers by quoting prices. In this way, silver prices are affected by a general market of buyers and sellers bidding on what they think prices should be now or at a later time.
Troy Ounces
If you are considering investing in silver, it is worth knowing one key fact about buying silver: Silver prices are quoted in troy ounces. This measure of weight is about 10 percent heavier than an avoirdupois ounce. (An avoirdupois ounce is what we recognize as a standard ounce, one-sixteenth of a pound.) Therefore, 10 ounces of silver coins weighs more than 10 ounces of hamburger meat. It is easy to be confused, however, by the fact that a troy pound of silver weighs less than a pound of hamburger measured by the avoirdupois standard. This is because there are only 12 ounces, instead of the common 16 ounces, in a troy pound.
Factors That Influence the Price of Silver
As noted, the factors that affect the price of silver are numerous. Most of them are the same as those that drive gold prices up or down. In brief, these include:
- Overall Demand: The market for silver in 2014 was just over 1 billion ounces. Non-industrial uses account for just under half of this amount.
- Industrial Applications: Over the long-term, increasing demand for silver in a wide range of industrial applications continue to drive higher prices. Silver is essential for the production of many types of batteries, bearings, printing inks, solar panels, brazing and alloys, and is even used in water purification. Projections show that nearly 700 million ounces of silver will be dedicated to these uses by 2018.
- Decreasing Supply: Overall, world demand has outstripped world production of silver since the mid-1950s.
- World Financial Conditions: Because silver is a currency with a physical, universally accepted value, silver can act as a safe haven fund (like gold) against failing paper currencies. More people buy gold and silver, and silver prices therefore rise (along with gold prices) when there is increased instability in the world and in financial markets.
Is Silver a Good Investment?
Because there are so many common factors that affect the price of both gold and silver, there is a long historical relationship between the prices of the two metals. Market participants who buy gold and silver pay a lot of attention to the Gold/Silver Ratio (often referred to as YG/YI).
Gold Silver Ratio
While there is an officially mandated gold silver ratio of 16:1 in the price of gold to silver (set into U.S. law in 1834), the ratio has ranged from 20 to 100 over the past century in free markets. It is important to note that freely traded markets have no correlation to government-mandated exchange ratios. Many argue that one reason for investing in silver today is the exceptionally high ratio that currently exists; if there were a move to a more historical relationship, the price of silver would rise dramatically. Therefore, buying silver now can position investors to enjoy future gains when the ratio decreases.
Portfolio Diversification
Another major rationale for investing in silver is the idea of portfolio diversification. Modern investment theory is based on the fact that adequate diversification provides both the best long-term returns on and protection of any portfolio. During stable economic times, investors might traditionally diversify 5%–10% of their overall portfolio into gold and silver holdings. However, considering the current state of the U.S. economy and the uncertainty of the U.S. dollars’ future value, investors might benefit from investing in precious metals at a volume of up to 20% or more of their portfolio, depending on the investor’s level of concern on the overall economy. For example, a precious metals IRA can leverage the power of precious metals for a stable retirement.