The true ratio of gold prices to silver prices should ideally be 20-to-1. That means that at July 29, 2015's spot gold closing price of $1095 an ounce, silver prices should be at $55 an ounce to align with that ratio. That's 340% above the current price of silver at $14.75 an ounce!
Silver has been living under the shadow of big brother gold and its price has been largely dictated by moves in gold and currencies.
It had become a troublesome investment metal since the decline of the photographic industry. But, viewing silver in isolation, it is a potential candidate for any investor who is looking for good returns over the long-term.
Supply and demand fundamentals of the metal are finally improving.
Global silver production has been on the rise, but that will soon change as low silver prices will discourage production. Prices fell almost 15% in 2015 so far, 20% in 2014 and 36% in 2013.
A combination of a lack of investment in new mines and the natural decline of aging mines are reasons for fall in production. Additionally, 70% of the world's silver is mined as a by-product of mining other metals, including gold and copper. Lower prices for these metals are encouraging less mining activity. Thus, less silver is being produced globally.
Ironically, this first drop in silver production in 12 years will coincide with a jump in demand for the metal.
Demand for silver coins and bars is expected to rebound and we have already seen a huge pickup in demand. Sales of these coins and bars already rose in the first and second quarter of 2015. This is partially due to the rising demand for silver jewellery from India as a proxy to gold.
But there's another new demand source and, surprisingly, it's coming from the industrial sector. Last year, this sector accounted for above 50% of overall demand for silver.
The solar industry alone is forecast to use at least 100 million ounces of silver this year. That number should rise every year, too, as more and more solar power installations come into being.
Hillary Clinton pledged last week that as president she would put the United States on a path toward generating enough renewable energy to power every home in the country by 2027. Clinton's plan focuses largely on residential power usage and is buoyed by a focus on solar. Clinton promised that the United States would have more than 500 million solar panels installed across the country.
India plans to build the world's largest solar plant that will produce energy comparable to four full-size nuclear reactors. Rising costs of electricity in Europe have made solar power more competitive than before vis-a-vis conventional sources of electricity. Around 18-20 grams of silver goes into a single solar panel. Solar power demand is slated to increase by 30-40% in 2015 itself.
Silver in nanotechnology is also a huge emerging industry. Silver's antibacterial qualities have applications that reach far beyond the medical world.
Washing machines, refrigerators, air conditioners, air purifiers and vacuum cleaners all rely upon silver nano particles to sterilise up to 650 types of bacteria. Nanotechnology is still at a very early stage in terms of its usage. The full extent of its application remains to be seen, but scientists and consumers are hopeful regarding the environmental implications of nanotechnology.
Of course, demand alone won't send the price of silver rocketing higher, but the combination of rising demand and less silver being mined will.
This apart the Gold/Silver ratio is historically out of balance. For thousands of years, the ratio of gold's value to silver's value was about 14 to 1.
From 1833 to 1876, that ratio was below 16-to-1. This was before it took off, never to return to those levels again until 1979. But even that was a special case, when the Hunt brothers famously cornered the market and manipulated prices up.
Coming to the 20th century, the steady gold/silver ratio started to become more volatile. It strayed far from the 14-to-1 historical standard. By 2014 average prices, the gold/silver ratio was 66-to-1. That number has only climbed in 2015 to a high of 76-to-1.
There is also silver's scarcity in relation to gold to consider.
According to Goldcorp Inc, a NYSE listed gold producer, there is one gram of silver for every 12.5 metric tons of earth. And there's one gram of gold for every 250 metric tons.
Just by those measures, the true ratio of gold prices to silver prices should ideally be 20-to-1. That means that at July 29th , 2015's spot gold closing price of $1095 an ounce, silver prices should be at $55 an ounce to align with that ratio. That's 340% above the current price of silver at $14.75 an ounce.
As prices languish near five year lows, it is important to understand the technical implications as the price itself discounts all fundamentals and is a lead indicator. Presently, there is no clear signs of a rebound yet and it looks like the current decline could stretch a bit further towards $13 levels or even lower to $12 levels in line with a fall in gold prices.
However, it is notable that Silver has fallen more than 70% from its highs, while gold has fallen only close to 40% from its highs. So, it is likely that while gold falls now, Silver's response could be muted and might not fall as much as gold and the retracement to be even sharper than gold.
So, we consider Silver as a wonderful long-term investment opportunity from current prices to wherever it might find a bottom at. Opportunity is always presented when in general most think there is none.
Technically, a strong long-term rising trendline support is seen between $13.50-14.00 (MCX - 30000-32000 approx) zone and we expect prices to either bottom out at present levels ($14.50-75, MCX - 34000) or the above mentioned zone and reverse higher towards $20-22 (MCX - 40000 approx) in the short-term and $27-30 (MCX - 47000-50000) in the medium- to long-term.
The local MCX price is subject to the Rupee trading above 61-62 for a dollar. Anything below 60 to a dollar could decrease our above expectations by 5-7%.
Gnanasekar Thiagarajan is a Director at Commtrendz Research and a consultant to commodity bourses and corporations both in India and the overseas. He has more than 20 years of experience in commodity and forex trading and was formerly a forex dealer with the Bank of Nova Scotia.
**Investors are requested to consult their financial advisors before making investments based on the above recommendations.
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