MF: Ever considered silver as an alternative to gold?
From gold parties to gold vending machines, the yellow metal seems to have a very high profile at the moment.
The standard 'safe haven' in a crisis, its status as a refuge in times of trouble was challenged to some extent during the depths of the most recent crash.
It performed better than many assets, falling by only a third from peak to trough, but that was at a time when many would have expected investor demand to be at its highest. In the meantime, most of that ground has been recovered, and there is speculation about new highs.
Gold's less glamorous sibling
But what of silver, gold's less glamorous sibling? Although a precious metal, it is decidedly more industrial than gold, while also acting as a store of value.
Just over half the silver output is used for industrial purposes, compared to something like one-eighth of the gold production. The single biggest use for silver is in photography, but with the increasing popularity of digital cameras this demand has fallen to less than half of its 1999 peak.
Other uses include jewelry and cutlery, both of which are also declining, but it is also used in batteries, electronics, catalysts and mirrors. Its properties as a bactericide are being more widely utilised in medical applications, washing machines, and other domestic appliances.
As a store of wealth, the fact that silver is more bulky than gold, for a given value, is sometimes cited as being in its favour. In the apocalyptic, Mad Max, world that some people are hedging against, paper currency will have no value, gold will be the real benchmark, but silver will be the de facto currency because it can be more easily exchanged in small quantities. That's the theory.
Supply and demand
Mining output has been gradually rising over the past decade, reaching 20,900 tonnes last year, most of this from Peru, Mexico, and China.
Almost all mining output is as a by-product of base metal production. The biggest silver mine in the world is Cannington, in Australia, which primarily produces lead and zinc -- it's owned by BHP Billiton (LSE: BHP).
Total demand has remained steady over the years, while investment demand has been increasing.
Valuation
As with any commodity, it doesn't pay interest or dividends, so putting a value on silver is really a matter of predicting trends and the tastes of speculators.
Being both an industrial metal and store of value, its hybrid status adds to the volatility in its price. Advocates of silver see it rising in a crisis, as a safe haven, and also rising as markets recover, due to its industrial uses. Historical data suggests this is a bit optimistic.
Having traded in the $4 to $6 per troy ounce range for most of the 1990s and up to 2004, the price then took off and almost hit $21 in early 2008, before crashing back below $9 in November. It has since recovered to around $15.
Some speculators like to look at the ratio of the price of gold to the price of silver, to get a feel for the relative values of the two metals. Having oscillated wildly between 40-times and 100-times the silver price over the past 25 years, the ratio now stands at 64x; make of that what you will.
But while the picture is complicated by the industrial applications of silver, in comparison with gold, it is simplified somewhat by the fact that central banks are not interested in silver, taking a significant wild card out of the equation.
How to buy
For most people, the most straightforward way to gain exposure to the silver price is through a physical exchange traded fund (ETF), such as ETFS Physical Silver, which is quoted both in dollars (PHAG) and in sterling (LSE: PHSP).
Physical ETFs invest directly in the underlying asset, in this case silver bullion, rather than in derivatives, thus reducing counter-party risk and avoiding the complications of contango. Be aware also that some people doubt the veracity of ETF audits; depending on your appetite for internet conspiracy theories, you may want to take a view on that.
But of course, if you go the whole way and subscribe the to Mad Max theory, you'll want small chunks of the physical stuff buried in your garden, and a very large dog.
