David Chaston looks at the other main precious metal, silver, and assesses how its price compares with gold

David Chaston looks at the other main precious metal, silver, and assesses how its price compares with gold
A one kg silver bar, .999 pure

As we pointed out recently, gold is expensive. One ounce has a base price exceeding NZ$2,180.

Although you can buy gold in very small quantities at investment purity (.999 pure), the premium for the minting is relatively high - that is, the cost above the quoted spot price can be a noticeable percentage of the price you pay. And when you sell, you will get a discount to the spot price, which could reduce your capital returns.

A more affordable way into building a precious metals holding is to build it in silver.

One ounce of silver today has a spot price of just NZ$42. One kilo might be a more mangeable NZ$1,370 than the NZ$70,000 plus you would need for one kilo of gold.

Silver often tracks the gold price due to store-of-value demands, although the ratio can vary. The gold/silver price ratio is often analysed by traders, investors and buyers.

In Roman times, the price ratio was set at 12 or 12.5 to 1. In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1, which meant that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1 was enacted in France in 1803.

The average gold/silver price ratio during the 20th century, however, was 47:1.

Physical silver is sold with a premium that is always higher than the spot price, the instantaneous price as quoted on websites like interest.co.nz. In most cases the premiums for physical silver are about ten percent or higher, with extra fees for shipping and storage as well.

Year Silver price
(yearly cum. avg.)
US$/oz
Gold price
(yearly cum. avg.)
US$/oz
Gold/silver
ratio
1840 1.29 20 15.5
1900 0.64 20 31.9
1920 0.65 20 31.6
1940 0.34 33 97.3
1960 0.91 35 38.6
1970 1.63 35 22.0
1980 16.39 612 37.4
1990 4.06 383 94.3
2000 4.95 279 56.4
2005 7.31 444 60.8
2009 14.67 972 66.3
2010 20.19 1,225 60.7
2011 35.12 1,572 44.7
2012 (cum. thru Sep 30) 31.59 1,650 52.2

From September 2005 onwards, the price of silver has risen fairly steeply, being initially around US$7 per troy ounce but reaching US$14 per oz. for the first time by late April 2006.

The monthly average price of silver was $12.61 per troy ounce during April 2006, and the spot price was around $15.78 per troy ounce on November 6, 2007. As of March 2008, it hovered around US$20/oz.

However, the price of silver plummeted 58% in October 2008, along with other metals and commodities, due to the effects of the GFC. By April 2011, silver had rebounded to reach a 31-year high hitting US$49.21 per ounce on April 29, 2011 due to economic concerns about inflation and uncertainty regarding bailouts in the eurozone.

From the year 1840 to 2012 silver had its life time high-price in 1980 when the Hunt brothers tried to corner the market in an infamous raid - that failed.

Is now a good time to buy?

It is not a question anyone can answer with any certainty, but the relation of the silver price to the price of gold is an good an indicator as any. The long term ratio shows fluctuations, but since 2005 the silver price has not dipped below 50 times the gold price for very long. As at today is is sitting at 54 times. On this basis, it seems fair to say that there seems less downside risk than upside risk at present.

Industrial demand is a much larger component for silver than it is for gold, and it is growing more strongly in all areas except for photographic use..

The traditional use of silver in photographic development has been dropping since 2000 due to the decline of film photography. However, silver is also used in electrical appliances (silver has the lowest resistivity of industrial metals), photovoltaics (one of the highest reflectors of light), RoHS compliant solder, clothing and medical uses (silver has antibacterial properties). Other new applications for silver include RFID tags, wood preservatives, water purification and food hygiene.

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You can find detailed, up-to-date pricing for gold coins, bars/bullion, and gold scrap, all in both NZ$ and US$, here »

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I like Silver for its industrial use and precious metal as a storage of wealth. Both gold and silver to head higher in 2013.