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All that glitters is not Gold - it's Silver.

All that glitters is not Gold - it's Silver.

Today I'm going to discuss the beauty of Investment Silver - the poor man's gold, or so it's called. 

As of the spot price right now, a 1oz Gold Britannia would cost £838.70 and a 1oz Silver Britiannia £20.55. (10:37 04/03/2015 LBMA)

But this price difference belies three very important factors. After we look at these factors it is clear to conclude that physical silver is in affect "on sale" at the current price and should, based on these factors, be priced much higher.  Because we sell Bullion we cannot advise you under UK Financial Law in your investment choices, no matter how much we would like our clients to benefit. But we can show you financial facts and hope you come to the same conclusions as we do, as to the appropriate action to take.  But ultimately, all financial decisions we believe are part of our overall individual responsibility in a free market. 
 
 

So here are the three factors:

 
 

1) Historical Price Ratio of Gold to Silver

 
The price ratio of Gold to Silver as of today is a staggering 74/1. That means Gold is selling at 74 times more than the price of Silver.  Yet this is on the extremely high side of history and is in many ways an anomaly that draws attention to itself.   
 
"This ratio is perhaps one of the more glaring disconnects in the market fundamentals underlying both of these precious metals and/or alternative currencies. The gold silver ratio significantly reinforces the urgency behind loading the boat with silver coins. Historically speaking, the gold silver ratio has rested somewhere between 15 and 10 to 1, reflecting the average supply of each metal. There have been times throughout the history of money where the ratio has been even lower—China had a 4 to 1 ratio at one point and the ancient Egyptians demonstrated a 1 to 1 ratio at one point." (SilverCoinInvestor.com)
 
So if this is the case, and historically Silver 'should' be priced at an average of 1/15th of Gold, then when Silver is selling at 1/74th of Gold's price, I can see which metal in which it would be prudent to stock up. It takes humility to look past the glitter and James Bondesque allure of owning Gold, to seeing the sister metal sitting beside it, having the potential for a much higher return.  
 
In our house we sometimes call paper currency 'monopoly' money. It's not actually 'real' but it's useful for trading, as long as everyone else agrees on the value attached to it.  But if the goal is to gain the greatest return over time in that monopoly money, it makes logical sense to at least consider investing in a metal that, sure isn't as glamorous, but holds a much bigger spring-back potential to its historical ratio value. To put it in perspective, if silver were priced in accordance with its historical value today, a 1oz Britannia coin would be priced around £56 each, not £20.55.  So if Silver were to revert to its historical price ratio of Gold today, that would be a 272% increase in price!  Take off the 20% VAT charged in the UK for most Physical Silver investments and that's still a return of 252%. Against the backdrop of painfully low interest rates for High Street investments, I wonder why half the country isn't buying Physical Silver as if it's going out of fashion.  Add in the advantage Bleyer offer of our low VAT/ VAT Paid Silver Shop and the lowest UK price on 1kg silver coins and we would encourage you to call one of our team to find out more.
 
 

2) The second factor that should be affecting the price of Physical Silver is Demand

 
If the price of Silver is currently only 1/74 of Gold, I would logically expect that for every 74 ounces of Gold sold, 1 oz of Silver would also be sold.  It makes sense in a free market surely, that the supply and demand ratio matches the price ratio.  But here is the second glaring anomaly.  I say glaring, but it's only there if you look for it as any prudent investor would.
 
Here are the figures from 2008 to 2014 taken directly from the largest mint in the world - the US Mint. These figures show the amount of Physical 1oz Gold and Silver coins sold, on the most popular gold and silver products - the national 1oz Coin. For the US it's the Eagle, for us over the pond it's the Britannia:
 

 

The conclusion drawn by FinancialSense.com is this: "Similar to the previous trend, the data are confirming silver’s relative strength in the physical market. The divergence in these figures is clear. Silver sales have reached an all-time high, while gold sales have declined, especially in 2014." 

Again, if I do the maths based on the current price for Silver, I would expect the demand for Silver to match this ie: as stated, for every 74 ounces of Physical Gold sold, there would be 1 oz of Silver sold. But this is not the case.  From the above figures, Gold is only shifting 12 times as much as Silver, not 74 times as much. 

Interestingly, the DEMAND for Physical Silver is much, much closer to its HISTORICAL PRICE RATIO to Gold (1/15.) The physical DEMAND RATIO of Gold to Silver is 1/12.  To put another way, 6 times more Physical Silver was being sold every day last year than one would expect based on the price ratio to Gold.   

It seems the free market is working very well and ignoring the paper price currently set for Physical Silver, at least on the 1oz Silver Coins. These are popular with our clients because they are flexible to resell, transportable and are often bought as beautiful gifts for relatives, including children and grandchildren. 
 
 

3) The third factor that should be affecting the current price of Silver is Availability:

 
Once again, if I were to guess from the price ratio of Silver to Gold which metal was more available, the logical answer would be to guess that Silver is 74 times more available than Gold.  Surely, the rarer something is the more value it holds and the higher its price in a free market?
 
But the greatest disparity is saved until last. The following is gratefully acknowledged from "Future Tense, Global Economic & Financial Discussions":
 
"In 1950 the 10 to 1 above ground supply ratio for gold and silver was still in place, which can be seen in the chart below. There were about 10 billion ounces of silver available above ground compared to only 1 billion available for gold. Fast forward to today and something incredible has happened. There is now currently 6 billion ounces of gold available above ground with only 1 billion ounces of silver available.


Silver is now 6 times more rare than gold in terms of what is available above ground. This is what is available for both investors and industrial companies to purchase immediately.

In addition to the current above ground supply, you must look at the new annual supply which comes from mining, scrap, and government sales. The following supply and demand figures come from The Silver Institute.

Total 2012 Supply: 1048.3 million oz
Mining: 787 million oz
Silver Scrap: 253.9 million oz
Government Sales: 7.4 million oz

This new supply is taken off the market through multiple forms of demand, the largest of which is industrial use. The industrial uses for silver range from electronics to solar panels and the number of uses is growing rapidly. For more on industrial uses see the following article from The Silver Institute.

Total 2012 Demand: 1048.3 million oz
Industrial: 456.9 million oz
Photography: 57.8 million oz
Jewelry: 185.6 million oz
Silverware: 44.9 million oz
Producer Hedging: 41.5 million oz
Coins: 92.7 million oz
Investment: 160 million oz

The last two categories listed above, coins and investment, are what you probably think of first when you imagine silver demand, but it is only a small fraction of silver use every year.
 

So with new supply being taken away immediately by so much industrial use, we are back to the treasure chest of the 1 billion ounces remaining above ground available to purchase.

With the current silver price of $22 (please note today's corrected spot price of $16 simply increases the veractiy of this point) that means that the entire above ground supply of silver can be purchased for $22 billion dollars. That is a spec of dust in the current financial world we live in.  To help put that in perspective, the Federal Reserve is adding $45 billion of new money to financial system every month. Other central banks around the world are engaging in similar programs. A conservative estimate would say that about one quarter of the new money that is created around the world every single month would completely wipe out the entire available silver supply on the planet. China or a large hedge fund could wipe out the entire physical silver supply with a simple keystroke.

This is an accident waiting to happen."  Thank you to "Future Tense, Global Economic & Financial Discussions" for this excellent research.
 
Conclusion: 
 
So in conclusion, I would say Silver is not so much the poor man's Gold, as a member of Royalty disguised in plain clothes! Because from these three factors, we the investor are left with a Reverse Reality. 
 
"If we could subtract the distractions and take a pure view of the gold silver ratio, which should always represent a reflection of true supply characteristics, we would find an entirely different reality. There is much more gold available below and above ground than silver. Practically all the gold ever mined still exists above ground in some place or another. Silver, on the other hand, is scarcer, both below ground, where it is mined primarily as a by-product, and above ground, where it exists in our tools of the modern world… and has been depleted… and will be found only as scrap in minute amounts in the trash heap." When markets revert back to the mean under disparities as described, this movement often happens quickly and without much warning.
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