MARKETWAVES
23rd-May-2005, 12:44 PM
Silver vs Gold
Silver bugs believe that, like gold, silver is money. They also
believe that the silver price is going to vastly outperform the gold
price because of silver's supply shortage. But silver is not money;
it's a commodity whose price is far more dependent on industrial
demand than on anything else. However, because the silver market is
so small, it is entirely possible for silver investors to create
their own self-fulfilling prophecy. You need to be nimble, and
remember to sell, to take advantage of such an increase in the silver
price.
Annual mine production of gold is about 80 million ounces while
annual mine production of silver is roughly 600 million ounces, yet
gold mining revenues are eight times more than revenues from silver
mining at current metal prices.
Why is gold expensive and silver less so? Because gold is money and
silver is primarily an industrial commodity. Even though silver has,
from time to time, been used as money, its chemical and physical
properties make it less desirable than gold as a monetary asset.
Among other things, silver oxidizes readily, and it is far more
abundant than gold.
Annual fabrication demand for silver is well in excess of eight
hundred million ounces a year, of which roughly forty percent is used
for industrial applications, just over twenty percent for
photography, thirty percent for jewelry, and the rest (less than five
percent) for coins and medals.
Because annual fabrication demand exceeds annual mine supply, silver
investors believe much higher prices are in store. However, since
industrial applications and photography account for roughly two
thirds of annual silver consumption, fabrication demand plays a key
role in the silver market. The silver price is thus very dependent on
changes in annual fabrication demand. As a result, continued economic
growth in North America and the rest of the world should help the
silver price remain strong and perhaps move up, whereas an economic
downturn could be quite detrimental to the silver price.
If we look at gold and silver in US dollars, then the relative
strength in the dollar since the early Nineties should have had the
same effect on both metals if they were priced as money, and their
charts should look the same. But they don't.
Silver actually performed much better than gold during the Nineties
because demand for silver supported its price during the high-tech
boom in the latter part of the decade. When the tech boom went bust,
silver suffered, and its price barely budged from 2001 to 2003 while
the gold price rallied strongly. Since 2003, gold and silver prices
have moved more or less in tandem, and that is a result of the
weakening US dollar. However, if we see a change in the economic
climate, the correlation between the two metals' prices can easily
break down again.
The amount of silver typically used in any given application usually
represents a very small component of the overall manufacturing cost.
Therefore the demand for silver from both industrial applications and
photography is very inelastic, meaning that if silver's price
increases, demand does not decrease.
At the same time, because the silver market is such a small market in
dollar terms, a relatively small amount of investment demand can
cause the price to spike dramatically. And because fabrication demand
is inelastic, fabrication demand will not decline due to the price
increase.
So speculators buying silver in anticipation of a move upwards can
easily create a self-fulfilling prophecy, causing the silver price to
soar. But when they want to sell their metal to take profits, the
same lack of liquidity that drove the price up will drive it right
back down again.
This combination of a small illiquid market, inelastic demand and
feverishly bullish investors could cause the silver price to
outperform the gold price at some point. However, you must be wary of
an ensuing collapse and remember to sell. Silver's day in the sun
might be very short-lived.
Still, there is no guarantee that the silver market will enjoy the
benefit of such a self-fulfilling prophecy. Judging by the silver
price since 1990 in relation to what we know was going on in the
world, it is entirely possible that silver will suffer along with
other base metals and commodities during an economic downturn.
Silver bugs believe that, like gold, silver is money. They also
believe that the silver price is going to vastly outperform the gold
price because of silver's supply shortage. But silver is not money;
it's a commodity whose price is far more dependent on industrial
demand than on anything else. However, because the silver market is
so small, it is entirely possible for silver investors to create
their own self-fulfilling prophecy. You need to be nimble, and
remember to sell, to take advantage of such an increase in the silver
price.
Annual mine production of gold is about 80 million ounces while
annual mine production of silver is roughly 600 million ounces, yet
gold mining revenues are eight times more than revenues from silver
mining at current metal prices.
Why is gold expensive and silver less so? Because gold is money and
silver is primarily an industrial commodity. Even though silver has,
from time to time, been used as money, its chemical and physical
properties make it less desirable than gold as a monetary asset.
Among other things, silver oxidizes readily, and it is far more
abundant than gold.
Annual fabrication demand for silver is well in excess of eight
hundred million ounces a year, of which roughly forty percent is used
for industrial applications, just over twenty percent for
photography, thirty percent for jewelry, and the rest (less than five
percent) for coins and medals.
Because annual fabrication demand exceeds annual mine supply, silver
investors believe much higher prices are in store. However, since
industrial applications and photography account for roughly two
thirds of annual silver consumption, fabrication demand plays a key
role in the silver market. The silver price is thus very dependent on
changes in annual fabrication demand. As a result, continued economic
growth in North America and the rest of the world should help the
silver price remain strong and perhaps move up, whereas an economic
downturn could be quite detrimental to the silver price.
If we look at gold and silver in US dollars, then the relative
strength in the dollar since the early Nineties should have had the
same effect on both metals if they were priced as money, and their
charts should look the same. But they don't.
Silver actually performed much better than gold during the Nineties
because demand for silver supported its price during the high-tech
boom in the latter part of the decade. When the tech boom went bust,
silver suffered, and its price barely budged from 2001 to 2003 while
the gold price rallied strongly. Since 2003, gold and silver prices
have moved more or less in tandem, and that is a result of the
weakening US dollar. However, if we see a change in the economic
climate, the correlation between the two metals' prices can easily
break down again.
The amount of silver typically used in any given application usually
represents a very small component of the overall manufacturing cost.
Therefore the demand for silver from both industrial applications and
photography is very inelastic, meaning that if silver's price
increases, demand does not decrease.
At the same time, because the silver market is such a small market in
dollar terms, a relatively small amount of investment demand can
cause the price to spike dramatically. And because fabrication demand
is inelastic, fabrication demand will not decline due to the price
increase.
So speculators buying silver in anticipation of a move upwards can
easily create a self-fulfilling prophecy, causing the silver price to
soar. But when they want to sell their metal to take profits, the
same lack of liquidity that drove the price up will drive it right
back down again.
This combination of a small illiquid market, inelastic demand and
feverishly bullish investors could cause the silver price to
outperform the gold price at some point. However, you must be wary of
an ensuing collapse and remember to sell. Silver's day in the sun
might be very short-lived.
Still, there is no guarantee that the silver market will enjoy the
benefit of such a self-fulfilling prophecy. Judging by the silver
price since 1990 in relation to what we know was going on in the
world, it is entirely possible that silver will suffer along with
other base metals and commodities during an economic downturn.
