In early 2023 an army of retail investors upended a tiny corner of the hedge fund market recently with a coordinated effort to buy up shares in an ailing company called GameStop. A week later the same army turned its sights on silver and the precious metal’s price soared. This exceptional situation can’t last forever and when the dust settles, will silver have emerged from the shadows of its more famous gold relative?
Like gold, silver has been highly prized for centuries. Its malleability means it has long been used in jewellery and decorative items, while its inherent value as a precious metal means it has been used as currency across many civilisations.
Ultimately, silver is not as rare or as valuable as gold, but it is a very important asset nonetheless and over the last several decades has become an increasingly essential component in industry and medicine. The furore created by the retail investment army is raising the profile of silver, highlighting its inherent usefulness, desirability and value.
Gold and silver’s relationship
The relationship between the value of gold and the value of silver is keenly watched. The two precious metals don’t always move in tandem on a daily basis; there are all manner of factors affecting the value of each. However, over the longer term, silver often tracks gold price trends. Their relationship is quantified by the gold/silver ratio.
What is the gold/silver ratio?
Simply put, the gold/silver ratio is the amount of silver required to buy an ounce of gold. If the gold price is $2000 and the silver price is $20, the ratio is 100/1. For many centuries from Roman times, the ratio had historically been around 12/1, but began to fluctuate in the 1900s.
Over the last 100 years, the ratio has been lower than 20 and higher than 100, shifting up and down on the back of rises and falls in the price of both commodities. When the gold/silver ratio is high it is often taken as a good time to buy silver, indicating that the silver metal is undervalued in relation to its pricier relative.
Recent gold/silver ratios
Just before the COVID-19 lockdown in March, the gold/silver ratio was over 120, the highest in a century, and well above the average over the 20th century of 47. At the end of January 2021, the gold/silver ratio had fluctuated between 70 and 80.
Since the Reddit rush at the end of January, the ratio has fallen to just under 63 as the silver price has risen. This is still low in historical terms, and while the analyst outlook for silver prices fluctuates, many see upside in the longer-term.
Will silver’s price reach $100 an Oz?
Silver’s volatility makes long-term predictions difficult, but some banks are bullish. Citigroup in October said silver could rise to $50 an ounce this year and potentially $100 an ounce the next. Other banks are more measured in their expectations. There is broad agreement that silver’s industrial use will underpin its value when the global economy finally emerges from the coronavirus pandemic and industrial output recovers.
Silver’s other uses
Silver is used in many industrial applications including in electricals and electronic devices, plasma TVs, LED lights, medical equipment, batteries, solar panels and many more products. The increasing focus by governments around the world on sustainability has spurred demand for silver used in green technologies especially solar panels. Demand for industrial silver may ultimately cause shortages if supply cannot keep up with the expanding list of products that need silver.
Industry accounts for well over half of annual silver demand. The industrial value of silver is tied to economic growth. Initial COVID-19 economic shutdowns took their toll on silver’s industrial outlook, but since then its value as a store of wealth has underpinned price growth. As lockdowns have eased and industrial production returns, the additional value in silver is returning. Silver has these two key bases on which to build further growth, along with traditional jewellery demand.
Is investment silver tax-free?
The treatment of silver for tax purposes is somewhat different from 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.
Silver, gold and Capital Gains Tax ( CGT)
Certain types of silver and gold coins are treated as legal tender and therefore not subject to capital gains tax. The silver Britannia coin 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.
Physical silver for investment
The frenzy of silver buying by retail investors reading social media site Reddit has largely been focused on paper silver, either mining companies exposed to silver or silver exchange-traded funds. The different tax treatment of silver as described above is one reason silver investors should consider the physical metal but equally important is the fact that physical silver removes wealth from the banking and financial system; therefore counterparty risk is minimised. People and investors who have wealth within the control of banks or financial institutions increase risk owing to that counterparty collapsing or refusing to cooperate. Owning the exact physical metal removes the associated risk of having these additional unnecessary parties – which means you have complete control over your wealth but in an undervalued asset that tends to increase in times of uncertainty.
The Reddit retail investors started out their silver raid with the aim of affecting the institutions that own or manage some of these paper silver vehicles. Whether or not they succeed with this aim, the risk has increased. This risk can be minimised by buying physical silver.
Ups and downs of silver price
Adding precious metals to an investment portfolio should be a considered purchase and one that looks to longer-term rises in value rather than short-term bets on making a quick buck. It is clear from its history that silver can be volatile over the short term. The recent rally is a case in point – it may not be sustainable after such a meteoric rise.
The advantages of silver have not disappeared. It is highly desirable for jewellery, remains valued as a currency, is increasingly important in an industrial context, and is a positive addition to any investment portfolio.
