If we want to understand currency and its value, we only need to peer back in history to understand the role that precious metals have played in trade. Precious metals have built and destroyed empires, depending on how these resources were managed.
Historically, a nation’s treasury was its wealth and power. If the treasury didn’t have a substantial store of gold, silver, precious stones and diamonds, the kingdom was weak, in debt, couldn’t afford to pay its army and was under threat of being taken out by a greater power.
It was not until credit notes (the precursor to today’s paper money) came into circulation in Europe that the idea of carrying around gold and silver coins became obsolete. Credit notes, in essence, were promise notes that the treasury, lender or bank could back up the value of the note with actual precious metal at the owner’s request.
Today’s equivalent of the King’s treasury is the bank, and our current fiat money system is the promissory note. But in the event of economic upheaval, what really happens to the value of paper money? We need only look at inflation to understand that the value of money can significantly vary. If a bag of onions costs 50 dollars, the value of money becomes inflated and out of sync with the actual costs of goods. We can see the detrimental effects of inflation in Venezuela in recent times, where money has lost all of its actual value, and people can no longer use the money for basic human necessities.
Whereas paper money can be printed infinitely, which can affect its value, actual gold and silver remain relatively stable in their value.
When we examine the connection between fiat paper money and its fluctuating value, we can better understand the real value of investing in precious metals such as silver.
While silver trades roughly in line with gold, unlike gold, the silver market is more volatile and fluctuates between being a store of value and its use as an industrial metal.
The value of silver has always fluctuated alongside innovations. Prior to digital cameras, silver was widely used in film and photography emulsions and the explosive demand for industrial items such as electrical appliances, medical products, electrical connections, various batteries, jewelry, ornaments, flatware, x-rays, superconductor applications, microcircuits, etc. This creates a bit of demand in the supply chain for gold and silver other than just investor properties that would typically just affect gold.
“Silver is a cheaper metal and more abundant,” suggests Atef of Express Gold Refining, “It is used more in the day-to-day. That is the main difference between gold and silver. In terms of volume, there is quite a bit more silver in circulation as it’s more abundant. There are major silver deposits in different parts of the world, such as Mexico, but there is even a little bit of silver in Gold mining. Silver is a residual that comes out of the process.”
Historically, silver has hovered at around the fifteen to 16 U.S. dollar mark, but over the last few decades, there have been spikes where silver has reached fifty dollars an ounce, definitely an all-time high. Since silver is cheaper per ounce, it tends to fluctuate more, and the fluctuations seem much bigger. Moving from twenty-two dollars per ounce to twenty-three dollars per ounce is equivalent to a 5% increase in price. People generally think of it as just a dollar, but it is equivalent to five thousand dollars in a silver contract. In essence, these are huge fluctuations that lend themselves better to more experienced, risk-taking investors.
WHAT IS A CONTRACT?
The way that precious metals are traded on the futures market is called a contract. There are standard contracts that dictate trades between inter-banking on the future Borsas. Each contract is defined as a certain number of underlying ounces of the metal. Gold, on the Comex, is one hundred ounces of gold and a Silver contract is five thousand ounces of silver. This is mainly why you get huge fluctuations in price.
GOLD AND SILVER RATIO
Traditionally, when people looked at gold, they would use a gold-silver ratio, measuring how many ounces of silver does it take to buy an ounce of gold. This measure gives us an indication of where silver is in comparison to gold.
To calculate, let’s say silver is at twenty-two dollars and gold is at seventeen-fifty. You would take seventeen-fifty and divide it by twenty-two. The ratio would be about eighty ounces of silver to 1 ounce of gold. That price would be considered cheap.
Traditionally, the ratio would be from sixty to sixty-five. There have been times where it has gone up to one hundred. Pricing used to be fifty ounces of silver to an ounce of gold, but we have gone as high as one hundred and twenty ounces of silver to an ounce of gold and are now back in the mid-range.
GETTING YOUR VALUE IN SILVER
When it comes to silver, you will want to invest in as big of a bar as you can. The larger the bar, the smaller the premium, and you want to preserve the difference you are paying for. Let’s say you have three thousand dollars to invest, it is better to purchase a one-hundred-ounce bar than one hundred single ounces. If you are a smaller investor looking to spend less, you can go with ten-ounce bars or 5-ounce bars, but the premiums get close to an ounce at that point, not making much of a difference.
Premiums on silver products have skyrocketed in recent years. Silver is heavy to move, and there are logistics to getting it around, which is built into the premium. Historically, silver was trading at 5-8% on premium for physical, and now it is at twenty-five to thirty percent on premiums.
Since silver is more risky, it is recommended to do seventy percent gold, and thirty percent silver split when investing in precious metals.
“We offer storage here at our facility, or your precious metals can be stored at a bank,” explains Atef.
“We’ve tried to make the process as easy as possible for any level of investor. For any investor interested in starting with us, we recommend browsing our website, where all of our products and live prices can be seen. If clients then wish to see physical products, they can come in and handle the precious metals in our inventory. We want the experience for our clients to be as convenient as going to the grocery store.”
“We suggest buying local products like Asahi or Royal Canadian Mint,” suggest Atef, “these tend to be cheaper because of the lower shipping costs. In contrast, buying Swiss Products that have to be shipped all the way from Europe significantly raises costs for the investor. We are fortunate to be the main distributor of Asahi here in Canada, and we buy directly from the refiner. There is no one in between, and as such, we are able to offer the lowest prices, putting more money back into our investors’ pockets.”
The great thing with silver is you know it will hold its value over time and has a base value that will withstand crashes. Another unique thing about silver is the fact that it’s an industrial metal, which means there will always be a need for it, even if there is a crash.
When considering making an investment, there is no number too small, to begin with. Some people start with eighty dollars, and others start at ten thousand. No matter your number, getting into the habit of transferring fiat currency into precious metals is a sure way to ensure the value of your money is actually protected.