New analysis: Silver is “the best precious metal play of the decade”

One analyst makes the black-and-white case for why right now may be a great time to make a move into silver. What facts back up his confident assertion? Find out here.

In an article posted on Seeking Alpha, boldly titled “Silver is shaping up to be the best precious metal play of the decade”, Caiman Valores recently published an in-depth analysis of silver as an investment.

Valores begins by arguing that silver, at its current price, is significantly undervalued. The current gold-to-silver ratio – a standard of measuring the relationship between the two metals and their value – puts silver in what Valores believes is an unrealistically diminished spot. Right now, 71 ounces of silver are needed to buy a single ounce of gold. However, when you consider that there are about 17 to 20 ounces of silver for each ounce of gold in the Earth’s crust, it’s easy to understand arguments that silver is due for an increase in value.

According to Velores, the current ratio would suggest “that silver is heavily undervalued in comparison to gold and that now is the optimal time to invest.” Even if the ratio were to level off just a little – even to only 50 ounces of silver to an ounce of gold – the metal would still increase in value by about 40%.

Global demand for silver is another topic that Valores investigates. The sources of demand for gold and silver vary significantly. For example, the largest driver for gold demand is from investors, with only 8% percent of 2014’s demand for the yellow metal being industrial. The situation with silver is pretty much the opposite, as the primary force behind demand is the 51% that goes towards industrial uses.

High industrial demand for silver is due to its variety of applications in many state-of-the-art technologies, whereas gold is generally regarded as a store of value and a material used to create jewelry. Many facets of the industry that use silver, like LED and touch-screen production, have demonstrated constant increases in demand for the metal with each passing year.

One industry to watch out for is green energy. Already demanding a huge amount of silver each year, a key component of solar panels (photovoltaic cells) is projected to experience a sharp rise in demand from now to 2018, especially as more nations make a push towards cleaner sources of energy. For example, over the next decade, China plans to use an additional 188 million ounces of silver for solar expansion, with Europe likely to require an additional 193 million during that time. Other parts of the world are also making similar strides.

These numbers of projected demand beg the question: Can supply keep up? The answer might be shaping up towards a simple “no”. Few realize that silver is actually already facing a supply deficit, with demand outstripping supply by half a percent – a troubling fact once we realize this amounts to a supply deficit of 4.9 million ounces.

The combination of ceased mining operations that are hard to re-start and an ever-increasing industrial demand seem to ensure that the supply deficit will continue into 2015 and 2016 – and if anything, they may become even greater. Of the effect this could have on prices, Velores forecasts: “I expect this constrained supply situation coupled with growing demand to drive silver prices higher over the long term, while placing a floor under existing prices.”

Volares doesn’t fail to consider the possible drawbacks of investing in silver, although many of them seem unlikely or outright rebuke themselves. For example, silver would likely not fare well if the dollar were to continue to increase in value relative to other currencies. However, the consensus is that the opposite will be the case. Similarly, while a boost in silver supply in the wake of increased demand would drive the metal’s price downwards, such a boost doesn’t seem possible due to long waiting periods before mining production can get underway.

These factors lead Volares to conclude that, despite short-term volatility, “the fundamentals are in place to support a solid rebound in silver.”

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