Sooner or later, if you spend enough time browsing through the financial media, you'll stumble into a piece by some frustrated gold analyst or otherwise disinterested fund manager, commenting on the difficulty of getting a handle on the insoluble forces that influence the long-term price of gold, with the inference typically being that gold belongs purely in the domain of the speculator.
But in truth, in this respect, gold has got nothing on silver. Silver is especially nebulous to analyse, largely on account of its duality as a precious metal and as an industrial metal.
Both silver and gold have risen strongly over the past 25 years. But of the two, gold has clearly been the stronger performer. But exactly why has this been the case? Why has silver proven to be the laggard for so long?
Some of the suggestions you find bandied around on the various silver forums in relation to this question seem unconvincing: the suggestions of silver price suppression by a cartel of major banks, for example. Arguments in relation to short-sellers keeping prices low have a maddening circularity to them, and my suspicion is that this line of argument serves to divert attention from more promising avenues of investigation.
So in the following post, I intend to pursue some of these, in the aim of teasing out some material answers in relation to the vexatious question as to what really underpins movements in the silver price.
If we take the last years of the 20th century as our starting point, you could have reasonably assumed that of the two best-known precious metals, silver had much more of a runway for growth, given that its traditional use in film photography started getting phased out on the late 1990s. On top of that, over the past twenty years we have seen extraordinary growth in photovoltaics, and of course, silver has played a key role in the production of solar cells.
But such trends are not particularly evident when gazing at a long-term silver price chart. Indeed, it is often hard to discern any rhyme or reason behind the peaks and troughs, probably even less so than with a comparable gold chart.
But when you compare a silver chart to that of other commodities, it becomes possible to pick out two fairly clear influences on the long-term path of the silver price.
The first of these is the most obvious: the trajectory of the silver price tends to follow in the wake of the gold price, or at least to some extent.
Since 1920, silver has ranged from being worth as much as one-twentieth of the gold price (in 1920, 1968 and 1970) to as little as just under one-hundredth of the price of gold, in the early years of World War II.
Personally, I think this low most likely represented the absolute rock-bottom for silver, and I don't think the price of silver relative to gold will fall to those WWII lows ever again. But if we exclude those years of tumult, the low end of the range for an ounce of silver is about one-ninetieth that of gold, back in the early 90s, which isn’t far removed from the current value of silver relative to gold.
While the above is by no means a narrow range, it at least illustrates that there seems to be an established ceiling and a floor for the silver price.
The second major influence on the price of silver -and, by definition, on the gold/silver ratio- is the cost of shifting it from point a to point b.
If someone goes to their local bullion dealer to purchase a million dollars worth of gold, at the current gold price, their purchase will weigh in at 15.7 kilos: light and compact enough to cram into a briefcase and then briskly walk away with.
But if our buyer had a perchance for precious metals of a paler hue, and thereby requests that the transaction be settled in silver rather than gold, that purchase is going to prove rather more incommodious: at the current gold:silver ratio of 1:84, their purchase will end up weighing in at just under 1.35 metric tonnes.
Hopefully this silver aficionado has got a pick-up truck on standby.
The key element that makes precious metals so univesally accepted is their fungibility. You can cart it around relatively easily, and it'll find recognition as a means of exchange pretty much wherever you go.
With this in mind, you have to ask, why would anyone back a second-rate precious metal that is so clunky that you need a wheel-barrow to shift the rather dubious value repository from place to place? Witnessing such a spectacle from afar, the outside observer might well be forgiven for concluding that silver investors would have to fall into one of two catagories, being either (a) crazy-brave contrarians or (b) complete morons.
Being invested in a number of silver stocks, I'm certainly hoping that (a) will in time prove to be the correct assessment. And I do think there is some good reason to believe that silver is headed for a strong run in the years ahead.
Anything that makes goods more expensive to move from place to place will result in a narrowing of the gold/silver ratio. The most potent of such factors is of course a rising trend in the oil price.
As evident in the chart above, the silver price tends to follow in the shadow of the oil price, although the movement does seem to be somewhat lagged.
This offers a convenient explanation as to why the silver price has proved fairly lacklustre over the past decade or so, or at least in relation to gold.
Essentially, for silver to soar, there needs to be two ingredients in the cooking-pot: Firstly, you need a strong gold price; and secondly, you need a strong oil price.
History suggests that if either or neither of these are strong, silver will struggle. Over the past several years, while gold has been strong, the oil price just hasn’t been pulling its weight.
However, there is good reason to suspect that the old oil paradigm is set to be turned on its head in the years ahead. Several challenges loom on the horizon for today's petro-states.
One of those roadblocks is climate change. In many countries, particularly in the developed world, new oil projects are increasingly liable to becoming stalled, or even postponed indefinitely, on account of 'green tape', which is likely to lead to higher energy prices. Indeed, that is partly the point: higher prices serve as a mechanism to incentivise end consumers to transit to cleaner sources of energy.
This is less of an issue in the free-wheeling oil producing nations of the Middle East. But the recent outbreak of violence in the Levant does raise a significant question mark over the security of oil supply in this region.
The flames of war leaves glowing embers in its wake, ever apt to spark terrible new infernos.
And then there is Russia. Even ignoring the impact of western sanctions on that country's oil industry, the woeful demographics of the once-mighty superpower are likely to stymie oil production from that nation before this decade is out. The horrible rates of attrition from the Ukrainian meat-grinder will only serve to compound Russia's already dire demographic situation.
In conclusion, with renewed questions over the reliability of oil supply from another key producing region in the wake of recent events, there are some signs that silver might be about to end its extended furlough in the doldrums.
History indicates that silver only soars when both the gold price and the oil price are strong. The price of the former has been at or near record highs over the past five years, but not so oil: I think this has been the real ball and chain for silver over recent years.
With new geopolitical tensions in the Middle East raising the spectre of another leg-up in the oil price, the prospect of the silver price climbing to new ten year highs might well be on the cards, or at least if we can rely on recent history as a guide.
