Silver rising as alternative to gold

Diwali

Every year, India’s Diwali celebration affirms the cultural importance of gold, especially considering that the country is home to 15% of the world’s population. This year’s Diwali (2012) marked a change in the usual tradition of buying gold for the festival. This is in large part due to gold’s record-high price for the month of November, of about S$2,100. Instead, Indians went to the next best thing — silver, which has long been looked at as ‘poor man’s gold.’

Lower supply, higher price

The fact that silver was used as an alternative during Diwali is just another sign of silver’s rising prominence in general. It is likely that we will be seeing a drop in the gold-silver price ratio, which recently has not gone much beyond the 35:1 level. As of December 3, 2012, the ratio is at 51:1.

A large reason for this foreseen drop is the fact that silver supply is tightening more than gold, even as industrial demand for silver is on the rise. As silver rises in price, this may mean substitution with cheaper metals for some purposes, exerting downward pressure on silver, but the fact is it really is the most ideal element for certain things, such as electrical devices and all sorts of machinery.

The gold-silver price ratio from 2008 to 2012
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More practical incremental purchase

In addition, silver is a more affordable choice as medium of exchange in comparison to gold. If one is to be buying at regular intervals, say, once a week, it is much easier to allocate for a couple of ounces of silver as opposed to ounces of gold. After all, at present prices, an unsegregated gram of gold is already worth about two ounces of silver. And a segregated gram of gold, that is, an actual gram sold individually, has a large premium that makes it worth about two and a half ounces of silver. This makes silver a more appealing choice for the average working person who wants to save a part of their money in precious metals, and who doesn’t want to deal with large premiums as are involved in smaller denominations of gold.

Conclusion

Whether or not silver will actually reach a price ratio of 1:1 to gold is debatable. After all, gold’s place as the medium of exchange has lasted for thousands and thousands of years, and it may take more than these supply issues for people to part with their unique fascination with this beautiful yellow metal. But even if silver falls short of attaining gold’s price, the ratio is likely to reach levels of below 30:1 or even below 20:1, which is closer to the historical ratio. It is thus sensible to allocate a good portion of one’s precious metals investment in silver in any case.