Why is Silver So Cheap? Uncovering the Factors Influencing Silver Prices

Silver has been prized as a precious metal for thousands of years, used in jewelry, currency, and as a store of value. Yet today, silver prices sit at just over $24 per ounce – a fraction of the price of gold at over $1,900 per ounce. What explains this vast difference in value? Is silver fundamentally undervalued, or are there valid reasons for its relative cheapness?

In this in-depth article, we‘ll put silver under the microscope, examining the historical, economic and market forces that determine its price. Whether you‘re a seasoned precious metals investor or a curious newcomer, you‘ll come away with a comprehensive understanding of the silver market and the key factors to watch. Let‘s dive in!

Silver Through the Ages: A Brief History

The story of silver is inextricably linked with the story of money itself. Silver first gained prominence as a currency in ancient Greece, where the silver drachma coin became a staple of Mediterranean trade. In the Roman era, the silver denarius became the backbone of the empire‘s monetary system.

Fast forward to the 16th century, and silver from the New World began to flood into Europe, ushering in a period of inflation. The so-called "Price Revolution" saw prices rise as much as 600% in some parts of Europe over the 16th and 17th centuries.

The 19th century saw the rise and fall of bimetallism, a monetary system in which both gold and silver were used as legal tender. But as major economies shifted to the gold standard in the 1870s, silver began a long demonetization process that would strip it of its centuries-old monetary role.

The 20th century saw silver‘s role shift increasingly toward industrial uses. The dawn of photography in the late 19th century created a major new source of demand for silver, which was used in photographic film. Later, silver found new applications in electronics, batteries, and solar panels.

Today, silver is dually coveted as an industrial metal and a precious metal investment, but its days as a leading monetary metal are long gone. This evolution is key to understanding its relative value.

The Economics of Silver: Supply, Demand, and Market Dynamics

At the most basic level, the price of any commodity is determined by the interplay of supply and demand. In silver‘s case, several unique factors influence this dynamic.

Silver Supply: Digging into the Numbers

Global silver mine production has been on an upward trajectory for decades. According to The Silver Institute, world silver mine production rose from around 548 million ounces in 2010 to 824 million ounces in 2020 – a 50% increase. What‘s driving this growth?

A key factor is that around 70% of mined silver is a byproduct of mining for other metals like copper, lead, and zinc. As demand for these base metals has grown, driven by industrial development and urbanization especially in China, silver production has risen in tandem.

Moreover, improved mining technology and the discovery of new silver deposits have enabled the economic extraction of silver from lower-grade ores. Mexico and Peru, for example, have seen significant growth in silver production thanks to new mining projects.

Year Global Silver Mine Production (Moz)
2010 548.4
2015 823.7
2020 824.1

(Source: The Silver Institute)

This rising tide of silver supply exerts a downward pressure on prices, all else equal. While silver mine production is expected to level off in the coming years, the silver market is not constrained by scarcity to the same degree as gold.

Silver Demand: Industrial vs. Investment

The demand side of the silver equation is more complex. Unlike gold, which is primarily used for jewelry and investment, silver has significant industrial demand. In fact, over 50% of annual silver consumption goes toward industrial applications.

The diverse industrial uses of silver include:

  • Electronics: Silver is the best electrical and thermal conductor of all metals, making it essential in electronic components. Every cell phone, laptop, and car contains silver.
  • Solar Panels: Silver paste is a key ingredient in photovoltaic cells, with around 20g used per panel. The rise of solar energy has been a major demand driver for silver.
  • Medicine: Silver‘s antimicrobial properties make it useful in everything from wound dressings to surgical equipment.
  • Other: Silver is also used in wood preservatives, water purification, and even odor-resistant clothing.

As global GDP grows and new technologies emerge, industrial demand for silver is expected to increase. However, this also means that silver demand is more cyclical and dependent on economic conditions than gold.

On the investment side, silver attracts both retail and institutional investors looking for precious metals exposure. Investment demand for silver surged in 2020 amid the economic uncertainty of the COVID-19 pandemic, with physical investment demand (silver coins and bars) rising 8% to 200.5 million ounces.

However, silver remains a far smaller investment market than gold. The total value of the world‘s financial gold holdings is in the trillions of dollars, while investable above-ground silver stocks are valued in the tens of billions.

Why Silver is Cheaper Than Gold: 5 Key Reasons

Now that we‘ve set the stage with silver‘s historical and economic context, let‘s directly address the question at hand: why is silver so much cheaper than gold? There are five primary factors at play:

1. Abundance: Silver is More Common Than Gold

The most fundamental reason for silver‘s lower price is its greater abundance in the Earth‘s crust. While estimates vary, the consensus is that gold is around 19 times rarer than silver in terms of occurrence.

This difference in scarcity is reflected in the historical gold/silver price ratio. Over the past century, the gold/silver ratio has averaged around 50:1, meaning one ounce of gold has typically been worth 50 ounces of silver. However, this ratio isn‘t constant and has ranged from below 20:1 to over 100:1 depending on market conditions.

Historical Gold/Silver Price Ratio Chart

2. Industrial Demand: Silver is More Exposed to Economic Cycles

As we‘ve seen, over half of silver demand comes from industrial applications, compared to just 10-20% for gold. This means that silver prices are more tied to the health of the global economy.

During economic expansions, industrial demand for silver typically increases, supporting prices. But in recessions, that industrial demand can dry up quickly, putting downward pressure on prices. Gold, in contrast, often benefits during downturns as investors seek safe haven assets.

This dynamic was evident in 2020. While both gold and silver prices ultimately rose due to investment demand, silver initially fell much more sharply as the COVID lockdowns caused a contraction in industrial activity.

3. Supply Growth: Silver Mine Output is Rising Faster Than Gold

Over the past decade, silver mine production has grown at a much faster pace than gold. This is primarily due to silver being a byproduct of base metal mining, which has expanded rapidly to support growing industrial metal demand.

Year % Change in Silver Production % Change in Gold Production
2010-2015 +50% +12%
2015-2020 +0.05% +9%

(Sources: The Silver Institute, World Gold Council)

This faster supply growth for silver relative to gold puts downward pressure on silver‘s relative price over the long term. While neither metal has perfectly elastic supply, silver‘s supply is proving more responsive to demand growth than gold‘s.

4. Portability & Storage: Silver is Bulky and Expensive to Store

The lower value density of silver compared to gold makes it more expensive to transport and store large quantities. At current prices, $1 million worth of gold weighs around 52 lbs and could fit in a small safe. The same value of silver would weigh over 1.8 tons and require a much larger vault!

This makes silver a less practical choice for institutional investors and central banks looking to hold large values of precious metals. The costs and logistics of storing and insuring large silver holdings can be prohibitive.

For individual investors, this dynamic is less relevant at small scales. But it does mean that very wealthy investors are more likely to favor gold, which supports gold‘s value premium.

5. Monetary Role: Central Banks Hold Gold, Not Silver

Perhaps the most significant factor differentiating gold and silver prices is their respective monetary roles. While both metals have been used as currency historically, gold has retained a significant monetary role while silver has been largely demonetized.

Central banks and international financial institutions hold nearly 35,000 tonnes of gold reserves, worth over $1.7 trillion at current prices. These holdings are a testament to gold‘s enduring perception as the "ultimate money" and a reliable store of value.

Silver, in contrast, is no longer held in significant quantities by central banks or governments. The U.S. government, for instance, sold off the last of its silver reserves in the 1960s and 1970s. This demonetization process has left silver primarily as an industrial and investment metal, not a monetary one.

This monetary differentiation is a key reason for gold‘s value premium over silver. Gold benefits from its official status as a reserve asset, while silver is left to compete as a quasi-industrial commodity.

Is Silver a Good Investment? Weighing the Pros and Cons

Given silver‘s relative cheapness, many investors are naturally drawn to its potential upside. If the gold/silver ratio were to revert to its historical average (around 50:1), silver prices could more than double assuming stable gold prices.

Moreover, silver‘s growing industrial use, especially in future-facing sectors like solar energy and electrification, paints a bullish demand picture. Some analysts foresee a potential supply deficit for silver in the coming years as industrial demand outpaces production growth.

However, silver‘s industrial exposure is a double-edged sword. An economic downturn could swiftly undercut that industrial demand, as we saw in the early stages of the COVID crisis. Silver‘s volatility is also significantly higher than gold‘s, which can make for a bumpier ride for investors.

Ultimately, whether silver is a good investment for you depends on your unique financial situation, risk tolerance, and market outlook. Many experts recommend limiting precious metals to 5-10% of a diversified portfolio, with the majority of that allocation in gold.

If you do choose to invest in silver, consider dollar-cost averaging into a position to smooth out volatility. And if you‘re buying physical silver, be sure to stick with reputable dealers and secure storage methods.

Buying Physical Silver: A Quick Guide

For those interested in adding physical silver to their portfolio, the most common options are coins, rounds, and bars. Silver coins, like the American Silver Eagle or Canadian Silver Maple Leaf, are a popular choice for their recognizability, liquidity, and divisibility.

When buying physical silver, look for a reputable dealer with transparent pricing and a buyback policy. Avoid paying high premiums over the spot silver price – aim for around 5-10% over spot for coins.

For storage, you have two main options:

  1. Home Storage: Invest in a high-quality safe and keep your silver at home. This gives you easy access, but be sure your homeowner‘s or renter‘s insurance covers the full value.

  2. Third-Party Storage: Pay a trusted third party like a depository or secure vault to store your silver. This can be safer and may be insured, but comes with ongoing costs.

Alternative ways to gain silver exposure without physical ownership include:

  • Silver ETFs: Exchange-traded funds that track the price of silver, backed by physical silver holdings. Examples: iShares Silver Trust (SLV), Aberdeen Standard Physical Silver Shares ETF (SIVR).
  • Silver Mining Stocks: Shares of companies that mine silver, offering leveraged exposure to silver prices. Examples: Pan American Silver (PAAS), Wheaton Precious Metals (WPM), First Majestic Silver (AG).

As with any investment, due diligence is essential. Understand the risks, compare costs, and never invest more than you can afford to lose.

The Bottom Line: Silver‘s Value in Perspective

Silver‘s relative cheapness compared to gold is a function of several interrelated factors, from its greater abundance in the Earth‘s crust to its diminished monetary role. But that doesn‘t mean silver is without value or potential.

As an industrial metal, silver is indispensable to the modern economy and stands to benefit from secular trends in electrification, solar energy, and technology. As an investment metal, silver offers diversification benefits and the potential for outsized returns (albeit with higher volatility).

Investors considering silver should weigh these unique characteristics and think holistically about how it fits into their broader financial plan. Whether as a small physical holding or a strategic portfolio diversifier, silver can play a useful role – but it‘s no replacement for the time-tested security and stability of gold.

The world of precious metals is complex and ever-changing, shaped by a confluence of economic, political, and technological forces. By demystifying silver‘s value proposition and putting its price into context, investors can make more informed decisions about this enduring yet enigmatic metal. In a world of fiat currencies and digital assets, silver‘s tangible value endures – even if it no longer gleams as brightly as gold.

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