Silver as Shield of Purchasing Power

Since the turn of the decade, preserving spending power has understandably become a goal for more and more people. The increase in purchases of stable assets, such as investment gold proves it eloquently. But for most of human history, silver coins and silver bars also played an important—sometimes leading—role in the monetary system. The reason is their stability over time. They have not lost it, even in our modern times.

Today, like investment gold, the white metal falls into the category of safe assets, known as safe haven assets. By definition, they perform well in the long run. This is true during and after periods of economic and geopolitical uncertainty. Representatives of this category have a weak relationship with the silver price changes of other popular instruments such as stocks, derivatives, real estate, and, to a lesser extent, bonds.

Since economies have regularly gone through interesting times of inflation and recession since the turn of the century and investment silver is a safe and affordable asset, interest in it has been on the rise. Global demand for silver bullion coins and bars grew by 20% in just eight years to the end of 2022.

Let’s get acquainted with the historical role of silver, the peculiarities of its presentation, and the current dynamics affecting its value.

Silver as money—the backbone of civilisation

The white metal has been a measure of value since Ancient Egypt. By the New Kingdom period, prices were presented in deben (weighing about 3 troy ounces or between 90 and 95 g) of copper or silver. From the natural alloy electrum, containing gold and silver, the earliest known coins were minted in Lydia. After which, the first means of payment, made mainly of white metal, began to be minted.

Lydian electrum stater—one of the first coins in human history

After the 6th century BC, the use of silver coins spread to many regions of the world. They remained in circulation until shortly after the middle of the 20th century. In some countries, only (or mostly) silver was used for centuries. For example, in China until the 19th century.

“Gold Standard” is a byword for quality, value, and sustainability. But the first widespread monetary standard in history was silver.

In the 15th and 16th centuries, the Spanish dollar, containing 0.82 troy ounces (25.56 g) of silver, was so reliable and popular that it was used practically all over the world. After gaining its independence, the US based its own currency on the Spanish dollar and even borrowed its name. The first US silver coins were slightly lighter, containing 0.773 troy ounces (24.06 g) of silver. This standard existed until the 19th century.

Silver as money—would it work for us today?

Silver is not a “relic of the past”. If it were still used as money, Americans’ purchasing power would be well protected. In 1964, the US minimum wage was $1.25 an hour. It was paid in five silver coins of a quarter dollar (quarter) or 25 cents. The precious metal content of each is 0.1808 troy ounces (5.62 g). Each employee received at least 28.1 grammes of silver per hour.

In recent years, there has been a push to raise the US minimum wage to $15 an hour. Working people do not need such measures, but stable money. If they were paid in the same five 25-cent silver quarters, today they would be paid the equivalent of over $22 an hour, given the ‘price’ of silver in them.

Read more about silver as a currency in The History of Gold and Silver as a Store of Value

Silver in euros

In a European context, silver has not reached its last peak of €32 per troy ounce since late April 2011. But in recent years, it has still been an adequate means of storing savings. Its average price for the period from 2014 to the beginning of the pandemic was 14 euros per troy ounce. Since then, it has increased by 60%.

When the euro-denominated silver Vienna Philharmonic debuted in February 2008, the silver it contained was worth €13 per troy ounce. Today, its value is almost twice as high—22 euros per troy ounce.

Over a longer time frame, since the creation of the single currency in 1999, the white metal has risen by an average of 9% per year. This result is despite the already-mentioned correction between 2011 and 2015.

Apart from the percentages, here are some interesting trends we are observing in the market. It makes sense to take them into account.

Gold, Silver and Commodity Cycles

The price of silver moves in a similar direction to that of gold (the dollar correlation between them is 0.77 over the past quarter of a century). However, its market capitalization is ten times lower: 1.3 trillion dollars compared to 13 trillion dollars. Therefore, silver is more volatile; less funds are needed to affect its price. The latter is often beneficial. When precious metals rise, it is usually the rise in the price of gold that serves as the bow that shoots the silver arrow.

Since the turn of the century, gold and silver have risen following economic recessions, regardless of whether they have undergone a correction in their course. In the six months following each crisis from 1970 to today, the price of silver rose by an impressive 17.4% on average. It receives an impetus in two directions: from the increasing industrial demand and from the monetary phenomena in the economic system.

Chart 1: Price of Silver Post Covid-19

We see this in the periods after the ‘dotcom’ bubble of 2000 and the recession of 2001, the Great Recession of 2008, and the COVID crisis, after which both metals showed good growth. Given the skyrocketing of key interest rates over the past year and a half in Europe and somewhat longer in the US, we can expect another recession in the not-too-distant future.

It is also very likely that we will witness a new precious metals and commodities cycle that started in 2015. If the trends in gold and silver, especially from the last 25 years, continue to be observed, the price of the yellow metal may continue to serve as a springboard for the white metal in the future.

Read more here: What Determines The Price of Silver? A Beginners Guide

What is happening to silver mining and demand globally?

Despite the correlation in the prices of gold and silver, there is a significant difference between them: half of the demand for the white metal is industrial. Silver is not just the metal with the highest electrical conductivity. Because of its various properties, it is easy to list in which industries it is not used instead of where it is used.

Increasing supply (i.e., yield) requires significant investment. But after investments in new fields increased significantly between 2000 and 2013, they have collapsed by 40% in the last decade. In this period, production has not budged. It was 845 million troy ounces in 2013 and 842.1 million troy ounces last year.

And recycling? In 2022, 181.1 million troy ounces of silver were recycled, the same as a decade ago. There is no silver bullet solution that will lead to a rapid increase in the supply of the white metal.

Why we need more and more silver

At the same time, its demand does not stop growing. Photovoltaic manufacturing is expected to consume 16% of all physical silver supply, or over 160 million troy ounces, in 2023. It will almost match the jewellery industry (190 million troy ounces). Compared to 2012, it increased by over 220%.

Investments in renewable energy sources are subsidised in much of the world. Therefore, they may not be too affected by an economic crisis, even if other industries suffer a downturn. In order to achieve the ambitious green goals, even more power, or even more silver, is needed. This also applies to electric cars, each of which contains between 18 and 50 g of silver.

Chart 2 : Silver Mined vs Industrial Demand

Last year, the demand for investment silver (ingots and coins) reached a record 332.9 million troy ounces, or 10.4 thousand tonnes. This is the fifth consecutive year of growth for this category. The Silver Institute forecast is that in 2023 it will remain above 300 million troy ounces.

Record shortage of silver

Rising demand and flat supply have created the biggest silver shortage since records began. It amounted to 237.7 million troy ounces last year. By comparison, this is a larger amount than the sum of the supply surpluses realised in the entire previous decade. This situation will not change. In the latest World Silver Survey report, they stated:

The deficit situation of recent years, which is expected to continue in the coming years, is likely to be observed for the foreseeable future. The Metal Focus 5 report predicts that silver supply shortages will persist in the market for the next five years.

In a slightly longer time horizon, it is unlikely that the shortage of silver will not affect its price, especially if these predictions come true.

The evaporation of reserves of physical silver

The physical metal is also disappearing from the leading exchanges. The LBMA in London recorded stocks of 840 million troy ounces in January before recovering slightly to 887 million troy ounces. This is the lowest since at least 2016.

Futures are traded on the COMEX exchange. Products that stand against them are usually not delivered. From 2021 on, there will be a dramatic decrease in silver reserves, from 140 to 27 million troy ounces. For every one physical troy ounce, there are almost 30 paper ones. If the delivery of even 10% of the contracts is requested, the exchange will not be able to fulfil it.

What do you think will happen to the price of physical investment silver in such a scenario?

Key Takeaways

Silver has always been used as stable money. Historical trends are not a guarantee of future performance or investment advice. This is true even when we have the centuries-old history of the metal being successfully used and used to store purchasing power. However, they are a guide to what we can expect. Silver has been through many economic uncertainties, such as rising interest rates, high inflation, and an impending recession.

The dynamics of world markets have added to these uncertainties. At the same time, it has a “floor,” a value below which it cannot fall. These are the so-called sustainable mining costs (all-in sustaining costs). When production costs per troy ounce are higher than the world price, at least some mines will stop producing the metal. It is difficult to calculate their value because it varies from mine to mine. The range is roughly between $9 and $15 per troy ounce.

The close relationship with gold and its evolving role as an industrial metal make silver an exceptionally accessible asset. Throughout history, it has consistently found a place in investment portfolios and investment decisions designed to safeguard purchasing power. Remarkably, silver retains its relevance even in contemporary times.