Is Silver Still a Monetary Metal?


"As with almost any investment, perception is the real key to value growth, and silver is perceived to rank alongside gold as an ultimate store of value."

One only has to compare the charts for the two main precious metals, gold and silver, to see how close the price movement correlation is for the most part. Yes, there are occasional anomalies, but broadly speaking the silver price moves up and down in line with the gold price, although the peaks and troughs tend to be more exaggerated. Indeed over the third quarter this year silver was certainly the best performing major metal commodity of all (if one ranks gold as a commodity which perhaps runs counter to my last article - see Gold is not a commodity but the strongest currency of all. In this article I am using the word commodity in a more general manner!).

Indeed, in recent years silver has performed very strongly. As Bloomberg recently pointed out, in the 15 months following the announcement of QE1, silver rose some 53%, double the rise in the gold price over the same period. Following QE2 silver rose 24%, about three times gold's rise. In the run up to, and aftermath of QE3 silver has again performed better than gold for the investor with a rise of around 25%—again around double that in gold. But silver is a far smaller market than gold in value terms and thus much more volatile and prone to concerted market activity, which can drive the price downwards drastically in a very short period of time, which makes it also a much more risky short term investment. For example while gold remains some 8% below its all time high, silver is still over 30% below its high of close to $49 achieved as recently as April 2011, so it hasn't all been an upwards rise for the silver investor. Indeed those who bought at the top will have suffered heavy losses.

But, while gold truly remains a monetary metal and forms a significant proportion of many countries' foreign exchange reserves, silver doesn't really hold that position any more except perhaps in specially minted bullion coinage. And while the silver bulls may point to the latter as proof of its monetary position, bullion coinage is, in truth, primarily a function of the commercialization of those national mints which produce it.

So should the silver price largely move upwards and downwards with that of gold as it is seen to do. Again as we pointed out here before (New innovations boost silver demand, but could price be taken down again?) in some views silver's future is much more as an industrial metal, although perhaps with some remaining vestiges of monetary overtones. While its main industrial use in photography has largely collapsed as a result of the ever improving digital technology and inkjet and laser color printing, silver is finding a myriad of new uses, notably in the high tech and medical arenas and this is underpinning its price to a great extent. Indeed some consider its rapidly growing use in these new fields of technology to be silver's real future - not its association with gold as a quasi-monetary metal. Jewelry and silver plate also remain major markets in the consumption arena.

But, silver will, in the minds of many precious metals investors, continue to be associated with gold regardless of any monetary overtones. As gold is inbuilt into the psyche as perhaps the ultimate in wealth (from folklore, fairy tales and tradition) silver follows not far behind. Gold and silver in many languages are synonymous with money and given that for the price of one ounce of gold one can buy more than 50 ounces of silver, and thus feel one has a significant amount of metal in one's hands, silver's appeal in this respect will continue. This will be particularly so in those areas where precious metals are seen as an integral part of the fabric of wealth, where millions, if not billions, of people are moving from abject poverty levels towards middle class status, but feel that the high gold price puts the yellow metal out of their purchasing zone.

As with almost any investment, perception is the real key to value growth—and silver is perceived to rank alongside gold as an ultimate store of value. It will thus almost certainly continue to move up and down with gold —but be more volatile in those movements and perhaps more vulnerable to a sharp take-down by powerful financial elements. If you are thus convinced that the gold price will continue on an upwards path as the global economy continues with its trials and tribulations, then silver will likely remain a great bet too with the basic potential for an even stronger upside. But beware the danger of the occasional very sharp fall along the upwards path.

Lawrence Williams

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