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The silver price through the years

The silver price has had its ups and downs, but like gold, the case for owning silver is strong in both good and bad times.

Silver's time to shine

Silver has had a remarkable journey, perhaps even more remarkable than that of gold. In 2002, the price was about S$8.24/oz. Two years later, in 2004, it was at S$11.28/oz, an impressive rise of 37%. But this was just the beginning. From a S$21.34/oz. price in 2009, the price shot up to over S$60/oz. in May of 2011, nearly 200% more, and over 600% from 2002! For over a year afterwards, the price hovered in the S$30s range per ounce.

The price of silver, SGD, 2003-2012
The price of silver, SGD, 2003-2012

Why these dramatic jumps and falls? Some would cite the disproportionate amount of ‘paper silver’ being bought and sold, that is, purchases/sales of silver that total more than the actual silver supply. It is claimed that there is a conspiracy wherein the big banks, fearing all this money going to precious metals rather than other financial instruments, want to bring down precious metals’ prices to manageable levels.

Other explanations

There are other explanations that do not give credence to such a deliberate effort by big banks. It is reasoned that if the overselling and overbuying of silver would alter prices to such extreme levels, this would be made up for by increased demand in the case of overselling and decreased demand in the case of overbuying, thus bringing the price back closer to spot physical.

Another reason given for the volatility of the silver price is that silver is a metal with industrial applications, and is thus affected by changes in market confidence. If people are pessimistic about overall production, this would have an effect on demand for goods, of which silver is a component. Without such demand, the price of silver will drop, in spite of its status as the definitive medium of exchange apart from gold.

Supply-demand balances out prices

No matter what theory you subscribe, markets will have to prevail in the end. There is only so much paper silver that can be used for shorting, before these are bought back to raise the price of silver once more.

A case for bullishness in silver in relation to gold, is the fact that its current price does not reflect actual supply relations between the two metals. Gold is currently priced closer to 50 times more than silver, yet gold is only roughly 10 times rarer. In addition, the price relation between the two during the previous peak of gold and silver in 1980 was closer to 30:1.

All-time record

Priced in Singapore dollars, silver was at the S$107/oz. level in 1980. Back then, the Singapore dollar was much weaker than the US dollar, hence the great difference from when it hit S$62/oz. in 2011. Priced in dollars, the 2011 and 1980 peak were similar (US$49/oz. and US$50/oz., respectively).

Still, with all the financial problems facing the West, as well as China and Japan, it is no wonder that some project the silver price to reach US$200, or about S$250. But no one can be certain of how soon such a peak, or beyond this price, will be reached. The most appropriate strategy is to continue accumulating at a constant rate, thus safely traversing the ups and downs in the silver price.

Buying physical silver means no counterparty risk

We discussed earlier how paper silver was being oversold to bring down prices to an artificial level, and how this could not last when increased demand brings prices up.

Now we look at another aspect of this: what happens if you had bought into these paper instruments? You will soon discover that you could not possess the silver you buy, because there is no actual supply in existence. And when more people realize that they are trading merely paper and not physical silver, this will be reflected in share prices, which will plummet. This is the risk that buyers of futures and exchange-traded funds constantly face. It is also quite possible that financial institutions engaged in brokering for these markets will likewise suffer, when their clients' funds get wiped out.

Meanwhile, the physical commodity itself will be sought out all the more, when people recognize that with it comes no counterparty risk, that is, the risk that another party will default or go bankrupt. The price of physical silver is poised to rise as a result.