While most investors are well aware of gold’s unprecedented march to $1,100/oz, far fewer are familiar with the yellow metal’s often overlooked cousin, silver (trading at $18/oz).

For centuries silver has always played "second fiddle" to its "prettier, more popular cousin," gold. While gold has continued to be the precious metal that everybody wants, loves and adores, wise investors are now beginning to take a good look at the value of silver in a diversified portfolio.

As the emerging economies of the world continue to diversify their reserves away from the US dollar, investors are looking to buy assets that are not dependent on the full faith and credit of the US government. Case in point – India’s recent purchase of 200 tonnes of gold from the IMF.

Gold has received a great deal of attention of late and according to the World Gold Council, gold demand rose 10% in the third quarter of this year primarily led by currency hedging.

Although silver has flown under the radar (thanks in large part to its price of around $18/oz.), many investors consider the metal to be a sound investment due to robust industrial demand and its traditional role as a store of value. These factors may help ensure that despite silver’s volatility, there will always be demand for this “forgotten precious metal.”

Silver’s recent performance
Looking at its performance over the past year, it does appear that Silver is revealing itself as a currency hedge and alternative just like gold. In 2008, Silver had a tough time, tumbling along with other base metals. However since October 2008, the performance has been quite remarkable. Year to date in 2009, Spot silver prices have increased 54% versus 31% for gold. The leading silver exchange traded fund (ETF), iShares Silver Trust (with holdings at a record 9,100 tonnes of physical Silver), has outperformed its gold counterpart by a factor of 2 to 1 in 2009. Also, demand in physical silver bars and coins have been noted to be tracking higher of late.

Silver-to-Gold Ratio
The US Congress established its monetary system in 1792 and agreed to mint coins using both gold and silver. At that time, 15 ounces of silver bought one ounce of gold. (In other words, the "silver-to-gold ratio" was 15:1.) The ratio was well established seeing that 15 ounces of silver had roughly equaled an ounce of gold for the previous four centuries (at least according to 1932 edition of the US Geological Survey Minerals Yearbook).

Now with governments around the world (particularly the US) having abandoned the backing of gold and then silver for their money, we have witnessed increased volatility in the ratio, first rising during the great depression era and peaking above the 90:1 level in the late 1930s.
Over the entirety of the twentieth century, the average ratio is estimated to have been 47:1 – a far cry from the 15:1 ratio of the nineteenth century. Today gold is even more valuable relative to silver, with the ratio currently standing at 62:1.

While predicting the optimum ratio (if there is one) is not the business of an astute investor, what’s worth noting is the declining trend of the silver-to-gold ratio (as seen in the chart below), from the highs in the 80:1s late last year to present levels.

What’s driving Silver’s demand
As the entire world continues to rapidly advance into the realms of modern day state of the art technology, medical research and infrastructure building, silver is noted as a far more useful metal that touches all our lives on an everyday basis.

Silver has a wide variety of industrial uses. Over 50% of all silver is used for industrial purposes, including uses in LCD/ Plasma TVs, solar panels, water purification and medical applications. Silver is also fast becoming a critical component of emerging technologies such as silver-zinc batteries for ‘smart’ cars, an array of portable electronic devices, and even biocides (which use silver in chemical agents to kill dangerous bacteria).

According to a New York based commodities research and consulting firm, Silver may further outshine Gold in 2010, as spot prices for the white metal respond to the prospect of a surge industrial demand, as well as investment demand. With the growth recoveries expected in economies of the world, fabrication demand led by the photography, jewellery and silverware sectors is also expected to rebound to “normal levels” in 2010.

Due to the expansive diversity of the applications for silver, it has proven to be one of the metals least affected by a sustained industrial slump. In fact, industry experts note that silver inventories were so run-down during the financial crisis that its traditional end users such as the global electronics industry would take a fair amount of time to replenish them to normal levels. Supply and demand dynamics as such, seems to reflect a return to a normal economy.



Investment Choices
For investors interested in gaining/increasing exposure to Silver, here is a summary of some investment choices:
• Bullion: Silver in the form of bars that are at least 99.5 percent pure.
• Official Coins: Silver coins issued by a government mint.
• Medallions (Rounds): A round piece of silver resembling a coin but not considered legal tender. Medallions may be issued by governments or private mints.
• Certificates or Storage Accounts: Silver is kept in storage but the investor can take possession within a few days if desired.
• Accumulation Plans: This approach enables investors to accumulate silver on an average basis, similar to dollar cost averaging. The investor does not own the physical silver.
• Futures and/or or Forward Contracts: An agreement made on an exchange to take or make delivery of silver at a set date in the future.
• Options: The right, but not the obligation, to buy or sell a silver or a financial security linked to silver on a specified date in the future.
• Exchange Traded Fund: A basket of equities linked to silver, i.e. the physical metal, producers, refiners, etc. ETFs are traded on exchanges throughout the trading day.
• Mutual Funds: An open-ended fund that holds a basket of silver-related equities that are priced once daily.

Sunil Khemlani
StoneBridge Securities (NZ) Limited
Email: sunil.khemlani@stonebridgegroup.co.nz

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