Sagar Salvi & Riken Mehta
“Buy yourself some silver chopsticks or some silver cutlery…you will be very rich in 5 or 10 years.” Well, that was investment guru Jim Rogers’ call at the start of 2011. Rogers is chairman of Rogers Holdings.
In 2011, however, silver prices remained somewhat flat as oppose to 2010, when prices surged 77%. Last year, though inflation had remained high, commodity prices could not take off due to government’s all out efforts to rein in inflation. In addition, absence of the much-anticipated QE3 from US Federal Reserve Bank has taken the sheen off precious metals further, especially in the short-term.
Nevertheless, a strong bullish case can still be made for silver over the long-term (read: next 3-5 years) on simple demand and supply factors. A major underlying aspect, which will drive up silver prices, is its industrial uses. In some cases, the widely used raw material cannot be recovered, which makes it that much dearer.
Moreover, we do not have an alternative to gold and silver for now.
Gold Vs Silver
Silver performed much better than gold in 2010 with prices rising by an astounding 80% which is two and half times the rise in price of gold. Along with being deemed a safe investment, the relatively low supply of the metal as compared to the high demand has also contributed to the steady increase in price. In the first three months of 2012, silver price increased at a steady 13.9% compared to gold’s 4.8% jump. Historically silver has outperformed gold year-after-year, with a high risk-reward ratio.
* Annual returns based on USD Gold and Silver prices
3 scenarios when Gold/Silver rally
1) When US dollar (dominant currency) declines, gold and silver prices see moderate gains-inverse correlation.
2) When US dollar strengthens, rupee falls, which leads to firming up of gold/silver prices domestically.
3) When demand for precious metals rise due to festive/social demand, prices escalate.
Recently, China has outpaced India in terms of gold consumption. So there is a fair chance that even if the US economy comes out of its recessionary-type situation leading to a stronger dollar, the growing Chinese consumption may keep prices of precious metals up.
To better understand the potential for rise in silver prices, we need to take a look at the gold-silver price ratio. For most of the nineteenth century, the white metal traded at a ratio of 15.5:1 (in USD terms).
Over a century or so the mean gold-silver ratio has been 45.69 :1 and at present the ratio is 52:1 (Gold price/Silver price)
Based on this assumption, here’s how gold-silver ratio pans out at various gold prices.
If Gold prices touch USD 10,000 per ounce, then silver price may touch USD 192, USD 222 and USD 645 per ounce with respect to Gold-Silver ratio of 52:1, 45:1 and 15.5:1. The above table indicates that silver is currently undervalued compared to gold and is in a position to generate returns substantially greater than investing in the yellow metal.
However, this is not a bearish indicator for gold, but a strongly bullish sign for silver. Even if gold prices were to fall by 20%, and even if silver assumed a 20:1 ratio instead of 15.5:1, this would still mean silver will rally more than 100% from its current price.
Therefore, it makes sense to stock up on that silver cutlery your wife always wanted!