With silver prices flat for the year, is silver a good investment to make right now?
Silver has not performed nearly as well as its high-flying days of 2009-2011, when it quadrupled in price. But that doesn't mean the metal doesn't have value to your portfolio.
Let's delve into some relevant aspects of the silver market to determine whether now is a good time to invest in silver.
Where Silver Is Trading Now
If we look at silver's price chart over the past year, we can gain some interesting insight:
You can see the price bottoming around $15.25 in November, then after a spike to $19.25, dropping back to around $15.50 in March. We can also distinguish a rising trend channel that seems to be establishing itself (green lines).
As for the 50-day moving average, it looks like it has stabilized, bouncing around the $16.50 level. Consider, though, that the 200-day moving average is still trending downward.
What will be especially constructive is when the 50-day moving average moves up to cross the 200-day moving average, better known as a "golden cross," a bullish signal potentially forecasting an upcoming trend change.
But to understand more about if silver is a good investment right now, at current prices, I always look at this indicator...
Determining Silver's Value
Another compelling buy signal for silver prices right now is the gold/silver ratio, calculated by simply dividing the gold price by the silver price. This metric essentially tells us how many silver ounces we can buy with one gold ounce.
As you can see from the accompanying chart, the ratio bottomed in April 2011 when silver peaked at $49 and has been steadily climbing since:
Since the precious metals bull market began in 2001, the gold/silver ratio has averaged about 55. Currently, we're sitting at 74, and it has been gradually declining since topping around 77 late last year.
As the gold/silver ratio declines, silver's price is rising relative to gold's.
I expect we'll continue to see a reversion to the mean of around 55 for the gold/silver ratio. Even if gold were to remain at its current price around $1,200, that would imply about $21.80 for silver, a bullish signal.
Is Silver a Good Investment Now? Check Out Demand Stats...
A third relevant aspect of the silver market right now is physical demand on two fronts.
First, recent research by Koos Jansen at Bullionstar.com indicates that Indian silver imports for 2014 were up an impressive 15% over 2013, at 7,063 tonnes versus 6,125 tonnes in the previous year.
It seems many Indians switched to silver when import taxes were imposed on gold, boosting its price relative to silver and making the latter more attractive.
Between January and April, India imported nearly 3,000 tonnes of silver, which, projected over the whole year, implies nearly 9,000 tonnes for 2015. If that plays out, it would represent fully one-third of annual mining supply.
Investment demand has also remained very robust. The iShares Silver Trust ETF (NYSE Arca: SLV) is one of the most widely recognized silver exchange-traded funds.
Interestingly enough, SLV's holdings have been climbing over the past three-and-a-half years from about 300 million ounces to roughly 330 million ounces, all while silver prices have been falling considerably.
And right now we're at the low end of SLV's holdings range. Should buying return with fervor to the silver investment market, and SLV in particular, it could easily add about 27 million ounces (nearly 10%) and still just end up near the top of its holdings range.
Finally, silver's industrial demand remains strong.
Thanks to silver's distinctive properties like malleability, ductility, conductivity, light reflectance, and antibacterial attributes, silver is often difficult, if not impossible, to substitute.
That's why, compared to gold, a higher proportion of silver supply ends up in industrial applications. In fact, of the 1.07 billion ounces consumed in 2014, over 600 million ounces found their way into industrial uses.
That's about 60% of the annual silver supply. And it's especially significant because most of that silver will never be recycled. Once consumed, it's gone.
What's more, new applications for silver are discovered almost daily, contributing to ever-higher consumption.
So what does all this mean for silver as an investment?
This doesn't necessarily mean we've seen an absolute bottom yet in silver. Nonetheless, all indications are that we're now much closer to a bottom in silver than a top.
Anyone who doesn't own silver should be looking to buy gradually and build up their position through dollar-cost averaging over the next six to 12 months.
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