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Gold vs Silver

stuart yeomans gold silver

Over the years, gold and silver have been invested mainly to hedge against inflation, deflation or devaluation. Anytime there’s economic uncertainty and a risk of higher inflation, precious metals become increasingly popular because of their perceived safety and reputation as strong inflation hedges. However, nowadays, investors view these commodities as an alternative to investing in equities. The reason is not only because of their ability to withstand economic recession but the returns they generate. The question is, which of these metals are better to invest in?

For the first time in history, silver mines are coming up empty even as demand surges. Used in over 10,000 industrial applications, from microchips to microwaves, silver is an indispensable metal that’s exploding in value. In 1950, there are 10 billion ounces of silver in storage, which is equivalent to 140 months of supply. However, now, there are enough supplies to remain for only 20 months. In 2010, the demand for silver reached to 1,047.7 million ounces making it the largest demand in history. Experts predict that by 2015, global demand will increase 36%, from 487 million ounces in 2010, to 666 million ounces. After all, modern technology cannot exist without silver. Consumption of silver has grown so much and we have consumed much more than what we are mining from the ground. Global industrialization and technological advancements of society has come to the point where we have consumed most of the historical silver reserves mined from early civilizations (95% of the silver ever produced has already been consumed).

In the past 10 years, the price of gold has climbed more than fivefold from less than $300 to more than $1500 an ounce. Silver has actually done quite a bit better, rising from less than $5 to nearly $30 an ounce which is about sixfold price gain over the past decade. It has even reached its record high $50 in 2011. Silver is much more volatile than gold. The metal’s 100-day volatility trend is twice as high as gold’s. According to Bloomberg data, investment worldwide made through silver-backed exchange-traded products reached a record high of 18,854 tons in November, and holdings now are estimated to be around $19.2 billion. The growing investor sentiment is down to several factors.

The price of silver could be set to soar for several reasons. The big advantage of silver is it’s not mainly a store of value like gold. Besides offering an inflation hedge and helping to calm investors, silver has many applications in industry, medicine and dentistry thanks to its electrical and thermal conductivity, usefulness in making metal alloys and other unique properties. Commercial and industrial applications account for about 60% of silver demand each year which is more than half of its demand. This source of demand is expected to strengthen during the course of 2013, thanks in part to expectation that the re-election of the Obama administration will keep monetary policy loose in the US.  With major economies such as the UK, eurozone, Japan and the US pumping money into their financial systems – in the form of quantitative easing in Britain and the expansion of the bond-buying program in the US – their currencies are being devalued, and investors increasingly turn to commodities, such as gold and silver, to offset this and to hedge political risks. With the US Fed’s quantitative easing actions, it’s worth noting that silver has risen with each QE instance: 53 percent for the first round, and 24 percent for the second.

Furthermore, while the United States and other Western economies have been struggling, China, India and many other emerging countries have been expanding by leaps and bounds. Their industries need lots of silver. Significant inflation isn’t here yet, but it could be on the way. China’s inflation has already risen and expected soar further this year. The US government has been printing billions of dollars to cover its huge debt, creating more new money in the past couple years than at any other time in U.S. history. This sets the stage for higher inflation by diluting the money supply and reducing the value of the dollar. The economy is at a crossroads of sorts: There are signs of recovery, yet conditions are ripe for inflation. In this situation, silver may be a better investment than gold because there are two sources of demand – investors and industry.

As a final point of fact, silver, which could one day get awfully close to the price of gold, remains very much a screaming buy.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

1 Response »

  1. Very interesting, will be good to follow the development of these two commodities over the next few years in terms of comparative value and demand changes due to scarcity.

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