The suddenness of the recent correction in broader markets is making many investors wonder if commodities like silver as well as silver miners should be in their portfolios. Let’s take a closer look.
The price of silver is volatile
To fully appreciate the price dynamics of silver, it is important to understand the role it currently plays globally. Like gold, it is considered a precious metal and is used as an investment medium in the form of bullion, coins, jewellery, or utensils, i.e., table silverware.
As silver exhibits high levels of electrical and thermal conductivity, it has an important role in industrial production, too. Indeed over 50% of the annual demand comes from industrial applications. But only about 10% to 15% of global gold demand comes from industrial use (i.e., the rest is used in jewellery-making or as investment).
This means that the two metals do not have exactly the same price dynamics. Economic growth can easily affect the price of silver, making it rather volatile.
Currently the price of the metal is around $15.5 per ounce. Since late February, the price of the bullion has become especially choppy — with a downward bias — on worries that the spread of the coronavirus globally may impact industrial demand adversely.
What is the gold-to-silver ratio?
I’d also like to briefly discuss the gold-to-silver ratio. Analysts use it to calculate how many ounces of silver it would take to purchase one ounce of gold.
Although their prices tend to move in the same direction, the pace of price growths and declines is different. As a result, this ratio isn’t stable but it changes remarkably over time.
Currently, the ratio sits over 97. Historically, it has been around 60.
Although the silver price has been falling in recent weeks, gold has recently hit a high for 2020. In fact the gold spot price is up over 20% over the past year, hovering around $1,590 per ounce.
In other words, when we analyze the historical levels of the ratio, silver has been underperforming gold. What could this mean for the price of silver?
If you think that the ratio will eventually revert back to the mean, i.e., toward the 60 level, then either the price of silver would have to go up or the price of gold would have to go down.
My bet is on the price of silver going up in the long run. However, for now, we’re likely to witness high levels of volatility in the metal.
Nonetheless, given the uncertainty regarding the global economic effects of the COVID-19 viral outbreak, your guess is possibly as good as anyone else’s.
Different ways to invest
Holding physical silver may provide exposure for those looking to hedge against inflation and diversify a portfolio away from equities. In the UK, the Royal Mint Bullion offers the opportunity to buy and sell the physical metal.
Alternatively, investors can consider exchange-traded funds (ETFs), such as the iShares Physical Silver ETC or the WisdomTree Physical Silver.
Finally, a rising tide usually lifts most stocks in an industry. Thus if you believe that the price of the metal may go up in the coming months, then you may want to consider buying into stocks like Fresnillo, one of the largest global producer of silver from ore and Mexico’s second-largest gold miner, or Hochschild Mining which owns mines in Peru.
tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.