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People buy precious metals for a variety of reasons, but what most folks have in mind is profit. Purchasing bullion at any time can meet this goal, but buying low then selling high is ideal. This is what makes the prospect of silver being undervalued so important.
Anyone who’s paid attention to bullion prices recently knows silver can perform well. In fact, demand for the precious metal was so high in 2020 that the U.S. Mint had difficulty keeping up. Even when pandemic buying isn’t a factor, though, could silver prices be artificially low?
It’s difficult to say for certain if silver is undervalued, but there are strong arguments supporting the theory. If you’re thinking of investing in the precious metal, understanding these arguments is key to making an informed decision.
Is Silver Undervalued: The Gold-Silver Ratio
There are many arguments that support the idea that silver sells for less than it’s worth. If you’re looking for the most convincing point, though, the buck stops at the gold-silver ratio. This is the proportional relationship between the price of gold and price of silver.
For instance, imagine a situation where silver’s spot price is $20 while gold sits at $1,000. This represents a ratio of 50:1 — because it would take 50 ounces of silver to purchase a single ounce of gold. It is the oldest continually tracked exchange rate in the world.
How can this ratio help if you’re contemplating buying silver coins or other bullion? First, it tells you precisely how much you can spend relative to gold products. More importantly, it shows why many people think that silver is undervalued and has been for some time.
Consider the gold-silver ratio throughout history:
- Ancient Roman Empire: 12:1 or 12.5:1
- 1792: 15:1 (set by statute in America)
- 1840: 15:1
- 1900: 31.9:1
- 1920 6:1
- 1940: 97.3:1
- 1970: 22:1
- 1990: 94:1
- April 2011: 31:1
- March 2020: 113:1
By simply looking at these numbers, you may not be able to tell why many people believe silver is undervalued. It’s easy to argue that the massive discrepancy seen in March 2020 related to a single event that drove the price of gold higher. That could be true, but it doesn’t tell the whole story.
To see the true problem with the gold-silver ratio, you only need to understand that its average throughout the 20th century was 47:1. Between 2016 and 2021, though, the average hovered around 80:1. It even hit 123:1 for a short time.
This is far from the historic average that has ranged from 10:1 to 15:1. So, is silver undervalued? The gold-silver ratio makes a strong case that it is. This has convinced many people that buying silver bullion is the right investment strategy. Before going this route, though, there are other considerations.
How Could Silver Be Undervalued?
The gold-silver ratio is only an indicator that silver prices may be artificially low. Before making investment decisions based on that, it’s important to understand what may actually cause this discrepancy. In many people’s minds, it comes down to two words: price manipulation.
You may have heard rumblings of this among online forums. While many dismiss this talk as conspiracy, the fact is that we’ve seen manipulation happen several times throughout history. In fact, JPMorgan recently paid $920 million in an investigation claiming they manipulated silver prices.
Less than a year after that nearly-billion-dollar payment, the bank paid $15.7 million to investors who lost profits due to the bank’s alleged price manipulation. This shows it’s very plausible that silver is undervalued. Unfortunately, this isn’t the first time we’ve seen this.
This history of the silver price shows how significant this issue can become:
- January 1979: $6.08/ounce
- March 1979: $7.38/ounce
- June 1979: $8.48/ounce
- September 1979: $14.04/ounce
- November 1979: $16.40/ounce
- January 1980: $49.45/ounce
We’ve seen silver perform well in recent memory, but that’s an increase of over 700% in a single year. What led to this? Three billionaire brothers decided to corner the market on silver. By the end of their efforts, they owned one-third of the world’s supply not held by governments.
This was in effect a “short squeeze,” which we’ll discuss more in depth below. The big point to take away is that it’s very possible that silver is undervalued due to price manipulation. While the billionaire brothers’ actions sent the price higher, price manipulation could easily go the other way.
If it’s possible for billionaires and banks to alter the price of silver, why would people invest in bullion? One reason is that the precious metal remains a solid store of value. Alternatively, many investors are excited at the prospect of major correction in the silver price.
The Struggle to Bring Silver Back
As an individual buyer, it may seem impossible to do anything if silver is undervalued. Fortunately, you wouldn’t be alone in this endeavor. An entire Reddit community — Wall Street Silver — is full of people with the goal of correcting the silver price.
While the description of the community is straightforward — “We are a community that loves silver, period” — there’s plenty of talk regarding price manipulation. And back in February 2021, the community was abuzz about a “silver squeeze” that was merely days away.
Unfortunately, the outcome wasn’t what many expected. Some saw this as evidence that billionaires had more control than once thought. Others just assumed there hadn’t been enough people buying silver. Shortly after the squeeze attempt, though, there was significant movement:
- December 2020: $24.19/ounce
- January 2021: $25.94/ounce
- March 2021: $26.17/ounce
- June 2021: $27.96/ounce
This increase is not proof that silver is undervalued. In fact, the price dropped back down to around $24/ounce in subsequent months. When taking all information into account, though, it’s hard to argue against the claim that silver’s price is artificially low.
Of course, such undervaluation isn’t necessary for the precious metal to be a good investment. Frequently referred to as “poor man’s gold,” silver has performed well as a store of value and hedge against inflation. This was particularly true during the 1970s.
If a price correction does occur, those who invest in silver stand to make a stellar profit.
Will Silver Be Undervalued in the Future?
Several factors point to an artificially low silver price. Many bullion experts believe silver is undervalued relative to gold by 10% to 30%. The big question is if this will ever change. Could the Wall Street Silver folks and like-minded individuals turn the tide?
This is a difficult question to answer. If larger forces really are holding the price down, it would seem necessary to overcome their efforts. Of course, this may not be necessary. If certain events transpire, it would take a herculean level of price manipulation to suppress silver’s price.
Consider the following issues:
- Government supplies dwindling: America had reserves of more than 300 million ounces of silver between 1977 and 1984. By 2018, this had dropped to less than 50 million ounces. If a sudden need for silver arises, the price could increase as the government buys new reserves.
- Industrial needs increasing: Silver is a major industrial metal. Fortunately for investors, industrial output has been on the rise for years. And when the economy fully recovers from the pandemic, it’s easy to envision industrial demand going even higher.
- Silver mines drying up: Experts expect silver mine production to start decreasing by 2027. This means supplies of the precious metal will dwindle. It’s possible that silver is undervalued now, but that’s unlikely to continue as less of the commodity is available.
While none of these situations guarantee that silver’s price will rise, their simultaneous occurrences seems like a “perfect storm” to many. Even if silver is undervalued — and even if it remained that way — these events still have the potential to cause a skyrocketing price.
The smartest strategy here is diversification. While it may seem tempting to take advantage of an artificially low price, remember that there are no guarantees in investing. Placing all your eggs into one basket is always a bad idea, even if the evidence that silver is undervalued becomes overwhelming.
Invest in Silver Bullion Today
When considering the value of silver, the most important indicator is spot price. As we’ve seen from history and the gold-silver ratio, though, this may not always tell the whole story. It’s possible that prices are artificially low, and if that’s the case, the potential for profit is significant.
Even with this potential for profit, it’s more important to focus on your individual investment comfort. Can you watch fluctuations in the price of silver without panicking? Are you looking for a short- or long-term investment? These and many other factors can affect your strategy.
At Silver Gold Bull, we hear buyers say silver is undervalued on a regular basis. They make solid points, but we also recognize the need for diversification. That’s why we offer a wide variety of precious metal items. Visit our Buy Bullion Products pages today to see what’s available.
