People love bargains. They will travel miles to find an item they want on sale.
But this behavior is rarely present in investing. Driven by fear of missing out, all too often investors follow the herd and buy assets in a bubble.
Do you remember the investment craze when the Nasdaq was trading at 5,000 in early 2000? Or Bitcoin above $19,000 last December? The mania quickly turned into devastating losses.
Conversely, when Goldman Sachs was trading at $52 in November of 2008 or GE under $7 in March of 2009, few investors had the guts to buy amid collapsing markets.
Only true value investors like Warren Buffett were buying.
My point is that forward-looking investors should always look for value in unloved assets that are trading near lows. That’s especially important in a world of low yields.
Today, gold trades under $1,300/oz. It’s been out of favor for more than seven years after it reached all-time highs in 2011 and some pundits were predicting $10,000 an ounce or more.
Look, gold is now trading at a 35% discount from its previous high. It is truly a bargain in a world laden with record levels of debt and artificially inflated financial assets.
In the long run, therefore, gold has nowhere to go but up! However, there is an even more attractive investment you can get into today.
The Best Bargain in Precious Metals
Silver is trading under $16/oz as of this writing, which is down two-thirds from its 2011 high of $49.
Today, silver’s value relative to gold is more attractive than ever since the Great Recession. Now the gold-silver ratio is more than 76 to 1, compared to an average of 62 to 1 over the last two decades, or 47 to 1 throughout the twentieth century.
Yet few investors invest in gold today, let alone pay attention to silver.
But it’s just sentiment fed by unattractively low prices.
Silver continues to be one of the most important industrial metals—with only few cost-effective substitutes. The metal has higher electrical and thermal conductivity than any other element.
This makes silver an important component in most electrical applications.
In fact, silver is the critical part of many high performance batteries, solar panels, and printed circuits whose demand is skyrocketing as renewable energy picks ups momentum.
Not only that, silver-based compounds can kill bacteria, algae, and fungi. They are used to purify, sanitize, preserve, and filter all sorts of liquids.
Silver also remains an important element in the manufacturing of mirrors, photography, and printing.
All in all, silver demand in manufacturing is expected to reach 680 million ounces in 2018, 27% up since 2013. This growth is mainly driven by growing demand in the solar and automotive industries.
But while silver demand is growing, its supply has been limited.
Global silver mining production peaked in 2015 and has since declined by 50 million ounces to 850 million ounces. Scrap silver supply peaked in 2011 at 260 million ounces and dropped down to 140 million ounces annually in the last three years.
The main reason is that a lot of silver exploration projects have been cancelled or put on hold due to low silver prices. And bringing new supply into production takes years.
Besides, silver is usually produced as a by-product of gold, copper, or zinc mining. This explains why silver supply is inelastic to change in price and why silver can be so volatile when demand outstrips supply.
That’s bad news for manufacturers but good news for investors as the silver price is likely to soar under constrained supply.
Silver Will Beat Gold in the Next Recession
Silver is still a bargain but that will change soon.
History shows that as precious metals come into favor again, silver is likely to beat gold.
Between 1970 and 1980, gold appreciated by 24 times while silver prices grew 30 times.
In November 2008, gold bottomed at $730/oz and silver at $9.3/oz; by April 2011 gold reached $1,890/oz and silver $49/oz, up 2.6 and 5.3 times respectively.
The reason silver tends to rise faster than gold is that the silver market is much smaller than gold’s. Besides, as we’ve learned already, silver supply is inelastic. That means a small increase in investment demand results in shortages.
As such, it’s reasonable to expect that during the next rally in precious metals, silver will the best metal to hold.