“Is Silver a good investment?” is a question many of our investors ask. Silver has been venerated as a precious metal for centuries and remains a steadfast staple of investors looking for the stability and long-term growth of a safe-haven asset. And yet it has always had to live in the shadow of its more valuable gold sister metal. While gold is up almost 20% in just three months, silver has gained over 35% in the same time. With broad industrial appeal, and the tendency to rise alongside gold when safe-haven commodities are rising, should we be investing in silver and is it actually silver’s time to shine?
The Current State of the Silver Market
Silver’s investment case is not dissimilar to gold. Historically, both metals have been used as a store of value and a form of currency. They retain value over long periods, making them reliable forms of wealth preservation. Investing in Silver is also a good diversifier because its price movements tend to be uncorrelated with those of other asset classes such as stocks and bonds. These similarities have meant silver has enjoyed substantial growth as safe-haven commodities ride the wave of geopolitical instability and economic uncertainty.
However, there are several differences in the dynamics of the silver market that could indicate it is ready for further upside. The most important is silvers’ use as an industrial metal. A significant portion of silver demand comes from industrial applications such as electronics, solar panels, and medical devices.
According to industry body The Silver Institute, the use of silver in industrial applications set a new high in 2023 at 654.4 million ounces This was underpinned by demand from green economy applications like photovoltaic cells in solar panels and other green-related technology, including power grid construction and electric cars. The industrial demand is only expected to increase over time. Artificial intelligence, green energy, biotechnology, healthcare and transportation, are all sectors that are expected to drive silver demand over the next decades.
Why Silver May Be Undervalued
The gold-silver ratio measures the number of ounces of silver it takes to purchase one ounce of gold. Some investors use it to gauge the relative value of the two precious metals and then make decisions about buying or selling them based on whether they think the metal is over- or under-valued.
The gold-silver ratio has seen significant swings, particularly during periods of economic crisis or extreme market conditions. For example, during the COVID-19 pandemic, the ratio spiked to over 120 in March 2020, reflecting a sharp divergence in the performance of the two metals. More recently the ratio has trended between 75 and 90 while the long-term average is closer to 60, indicating there may be scope for silver to strengthen relative to gold.
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More reasons for optimism
Both gold and silver, as commodities, tend to rise when inflation increases, which makes them attractive inflation hedges. This is not a perfect relationship, but it is a consideration when investors choose their asset portfolio. While inflation has finally eased from its highs of the last two years, precious metals like gold and silver have continued to hold their own. This despite the rise in interest rates which would normally make non-interest paying assets like gold and silver less attractive. The anticipation of a cut in interest rates in the US helped both metals rise in value in the early part of 2024, although the expectation that rates may be higher for longer could dampen some of that momentum.
Meanwhile global geopolitical tensions that are impelling safe-haven gold buying are working for silver investment in the same way. The similarities of the metals make them both attractive when times are uncertain, but as there are still differences in their investment case, they can both be used as diversifying assets in a portfolio. That’s why many investors choose to hold both gold and silver, rather than limiting their options.
Silver’s supply-demand conditions, meanwhile, are expected to have another very strong year in 2024. According to the Silver Institute: “robust gains from photovoltaic applications and decent performances in other segments are expected to see industrial demand reach a new all-time record… Crucially, supply will continue to stagnate, with a marginal decline forecast for the year. This will drive the market deficit up by 17%, to 215.3Moz (6,695t) for the year.”
Investing in silver
Even though silver is a safe-haven commodity with long-term growth prospects, it remains much more volatile than gold and it is more sensitive to economic changes. Silver’s price swings can be higher than gold but they go both ways, and this is used by some investors to trade more frequently with the intention to turn a quick profit. Gold on the other hand tends to take a longer-term place in an investment portfolio. This speculative silver demand is a valid strategy for experienced investors who understand the risks, but silver can also be held, like gold, for the long-term. Its’ price entry point is much lower so it can appeal to new investors looking to dip their toe into precious metals.
Tax advantages of investing in silver
The treatment of silver for tax purposes is somewhat different to gold, but it is still possible to buy and sell silver tax and VAT free within certain parameters. Investment grade gold has been VAT exempt since 2000 but if you store or get delivery of silver in the EU it becomes liable for VAT, which in the UK is 20%. You can however choose to buy silver and have it stored in a secure, allocated vault outside the EU thereby bypassing the VAT requirement.
And certain types of gold and silver coins are treated as legal tender and therefore not subject to capital gains tax. The silver Britannia is free from CGT for UK citizens and any amount can be bought and sold without incurring the tax. There is CGT to pay on gains made from other forms of silver including silver bars.
The global economic recovery, rising industrial demand, favourable monetary policies, high gold-silver ratio, increased investor interest, technological advancements, and potential supply constraints all point towards a positive outlook for silver. As with any investment, it’s important to consider your risk tolerance and investment goals, but silver is an attractive precious metal investment that could add diversity and safe-haven security to your portfolio, alongside its more glitzy gold relative.
