This year has seen solid gains posted by precious metals. Gold has been one of the best performing assets in the world this year posting a 23% rise. However, silver has vastly outperformed gold and has gained over 38% year-to-date. I’m a precious metals bull and I think that silver may be the most undervalued asset in the world. 

Economic headwinds

It’s well known that precious metals outperform in recessions and periods of economic uncertainty. This year gold and silver prices have been spurred on by the Chinese economic slowdown, the Federal Reserve delaying interest rate hikes in the USA and Brexit to name a few factors. Investors buy metals due to the safe haven characteristics of the assets and that should continue to happen if the world economy keeps struggling to grow at reasonable rates. 

Gold:Silver ratio

The gold:silver ratio is a good barometer of gold and silver prices. The extremely simple ratio indicates how much silver it takes to purchase one ounce of gold. The ratio currently sits at around 69.5, which is well above the five-year average level of 50-60. This is still much higher than the 100-year average of around 40. To me this indicates that silver is undervalued and that any further gains for precious metals will see silver continue to outperform gold. The industrial uses of silver should also help the gold:silver ratio narrow back to normal levels and in the future possibly go much lower. 

How to gain silver exposure

Gaining exposure to silver is slightly harder than gold as there are many more gold mining companies, funds and ETFs to choose from. However, listed in London there are a few fantastic silver mining companies that deserve a look. The first is Fresnillo  (LSE: FRES), which is the biggest silver producer in the world and based in Mexico City. Fresnillo’s Mexican assets are of very good quality and produce about 900,000 ounces of gold a year too. The company has seen its share price rise over 137% this year and it should continue to rise if the silver price rises too.

The second silver miner to look at is Hochschild Mining  (LSE: HOC), which has performed remarkably this year and has posted a 439% increase in the share price since 1 January. Hochschild operates three producing mines in Peru and one in Argentina. The company is increasing production and continuing to lower costs, which has resulted in a first half profit in 2016 of over $60m. 

Both of these companies should continue to rise along with silver prices but for me the key issue will be interest rates in the USA. If the Federal Reserve doesn’t raise rates this year then I think that silver prices could easily rise another 10%-15% before Christmas. That could mean another 20%-30% rise for silver producing companies due to increased profits. 

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Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.