Buying silver jewellery isn’t such a bad idea after all

“I was thinking of buying silver jewellery for you,” the boyfriend told me early in the morning.

“Silver?” I asked.

“Yeah. I mean jewellery is always made of precious metals, and the rate at which silver prices have been going up, silver jewellery will soon be very popular,” he explained.

“You think so?”

“At the current price of gold, do women have an option?”

“Women always have an option. I mean which woman would prefer silver jewellery to gold?”I retorted.

“Yeah. So I guess it’s their husbands and boyfriends who won’t have an option.”

“Yes. For once you are right.”

“Thank you.”

“But to tell you the truth I really don’t mind being gifted silver jewellery.”

“Oh, and why?”

“For the simple fact that silver works both ways.”

“Both ways?” he interrupted.

“Yeah. It works as a hedge against all the money printing that is happening all over the world and it is also an industrial metal.”

“So?” he asked.

“Ah. Sometimes I feel that I really deserve a more intelligent boyfriend.”

“Well you always have an option.”

“I’ll remember that.”

“Well,” he shrugged.

“Let me get back to what we were discussing. As I have told you time and again, when governments resort to printing more and more currency notes as they are doing now to repay their bloated debts and revive their moribund economies, it leads to a situation where people start losing faith in the currencies. So they start to replace what they think is “bad” money i.e. paper currency, with good money i.e. gold and silver.”

“But why gold and silver?” he interrupted, asking a stupid question again.

“Well, for the simple reason that gold and silver have always been used as currency. As James Turk and John Rubino write in The Collapse of the Dollar, “after much trial and error, most societies settled on pieces of metal as their money... metals like bronze, copper, silver, and gold could be mined, smelted, and turned into recognizable, more or less identical coins that could then be traded and stored. Bronze and copper, being more common and less attractive, became small change, while silver generally took the midrange and rare, beautiful gold became the most prized of all.””

“I think you have mentioned this before,” he said.

“I sure have. And I am so glad you remember.”

“Thanks.”

“And people realise that unlike paper currency, gold and silver cannot be created out of thin air, so they move their wealth from paper currency into silver and gold.”

“Makes sense.”

“That explains one part of the equation. People are buying gold and silver as a hedge against all the paper currency that is being printed. And that is one reason why the price of both gold and silver is going through the roof,” I said.

“So what is the other part of the equation?”

“Well the other part is that silver is an industrial metal with widespread use, across industries. So, if the various economies around the world start recovering, then the demand for the industrial uses of silver is likely to go up as well. And this can only mean a higher price, as silver supplies are restricted.”

“I remember this one. Silver has lots of industrial uses, given that it is the most malleable and ductile metal, after gold. Silver is currently used in electrical applications like conductors, switches, fuses etc. It is also used in photography, and silver alloys are used as cathodes in batteries. Interestingly, the new uses of silver keep growing.”

“I’m impressed. In fact, gold is more malleable and ductile than silver, and even a better conductor of electricity, but it is not monetarily feasible to use gold for these industrial uses, given its very high price. So it is not that gold cannot be used industrially —- it’s just too expensive to be used like that,” I said.

“I did not know that.”

“There is a lot that you do not know. Also a lot of silver has simply been used up. As Mark O’Byrne, executive director of Gold Investments wrote in a recent column “In 1900 there were 12 billion ounces of silver in the world. By 1990, the internationally respected commodities research firm CPM Group say that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to less than 1 billion ounces in above ground refined silver. It is estimated that more than 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defence and electronics industries.” Given that silver is used in very small quantities it is very difficult to recycle it. Also in comparison estimates suggest that the world has 5 billion ounces of gold.”

“But why can’t we simply produce more silver?” he asked.

“Silver production cannot be ramped up quickly to match this increased demand. The primary reason for this is that it is rare to find a pure silver deposit. As O’Byrne writes “Supply didn’t increase significantly in the 1970s when silver rose more than 35-fold in price —- from $1.40 per ounce (one troy ounce = 31.1 gram) in 1971 to a high of nearly $50 per ounce in 1980. Importantly, silver is a by-product metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production... There are only a handful of pure silver mines remaining — many with depleting reserves.””

“Interesting.”

“Yes. So if the current slowdown across the world continues, the demand for metals like copper, nickel and zinc from which silver is mined, might fall further, in turn decreasing the supply of silver.”

“It is so interlinked. If the world economy recovers, the demand for silver goes up, and so silver prices go up. If the world economy continues like it is today, the supply of silver will get tighter and silver prices will go up. Of course, gold is not an industrial metal, and it will not benefit if the economies around the world start recovering. But it will benefit if economies continue to be moribund and governments continue to print more money. Silver on the other hand will benefit both ways, if the world economy recovers and even if it does not.”

“In fact, the interesting thing is that after many years of being down in the dumps the potential of silver as a mode of investment is finally being realised. According to the GFMS World Silver Survey, total silver investment in 2010 including coins and “implied net investment” jumped 40% to 279 million ounces. Despite this, the market for investing in silver remains very small. As Jeff Clark, editor of Casey’s Gold & Resource Report, points out, “All exchange-traded funds backed by the metal amount to $20.7 billion. You can see how this compares to some popular stocks. All silver ETFs combined are less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the 2008 meltdown. Exxon Mobil is more than 20 times bigger. He further says “While you fetch your magnifying glass, I’ll tell you that the market cap of the silver industry is $73.1 billion. It barely registers when compared to a number of other industries I picked mostly at random. The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger... And here’s the fun one: the market cap of the entire silver market, with all its record-setting prices and stock-screaming highs, represents just one-third of 1% of the oil and gas industry.””

“Are you saying silver is a better investment than gold?”

“Yes, primarily because it’s a smaller market the spike in price will be faster. As O’Byrne writes “today there are hundreds of billionaires, some multi billionaires, thousands of millionaires, hedge funds and many sovereign wealth funds. Small allocations by any of these will see sharp moves in the price.” Of course, this means in case all this doesn’t hold, the price could fall faster as well.”

“Hmmm. High risk, high return.”

“Yes. So when do we go to buy silver jewellery?”

“Oh. Whenever you want to. Silver is nowhere as expensive as gold.”

“Yes. That is correct. But I am not letting you go cheaply. Well, you wanted to gift me a chain of one tola of gold. Now I will buy 1 kg of silver jewellery.”

“Oh. Wouldn’t that be too much?”

“Yes. So I will buy whatever I want to and for the remaining weight we will buy silver bars,” I said, having the last laugh.

The writer works in the financial
services industry and can be reached
at chandniburman@yahoo.com.
Views are personal.