For years silver has been the bridesmaid to gold’s bride, as the glamorous yellow metal has outshone its grey rival.

Gold has grabbed investor headlines because of its much higher price and bigger profile.

Things may be about to change in silver’s favour, however, and this is down to an obscure trading tool called the gold to silver ratio.

The ratio highlights how many ounces of silver are required to buy one ounce of gold.

At current prices, $US1,810/oz for gold and $US19.30/oz for silver, it takes nearly 94 ounces of silver to buy one ounce of gold.

For centuries right up to the late 19th century the ratio was relatively steady, varying from 15:1 to 30:1.

gold_silver_ratio
Gold-Silver Ratio. Source: gold silver.com

Merchants would sell their gold and buy silver when the ratio was high in anticipation that the market would correct, and when the ratio fell, they would sell their silver to buy more gold.

This trading mechanism enabled merchants and traders to profit from price movements in silver and gold. It also worked in different countries.

For example, the gold-silver ratio may have been higher in France and lower in the United States, enabling keen-eyed merchants to profit from the difference or arbitrage.

The ratio increased in volatility from the 1870s. In some rare cases it soared close to 100:1 as in 1941 and 1991, and in other times dipped under 20:1 as in 1919, 1968 and 1980.

 

Silver as a currency

Silver was a monetary metal used in international trade throughout the 19th and early 20th centuries. For example, the US minted a special silver dollar for trading purposes.

Hong Kong minted its first silver dollar in 1866 for trade between western nations and China.

Gradually, silver coins became less relevant to international trade, and nations stopped minting them for overseas and domestic markets.

The United States was one of the last countries to stop using silver currency.

In 1964-65 under President Lyndon Johnson, silver coins such as the dime (10c) and quarter (25c) that had a silver content of 90 per cent were withdrawn from circulation.

Part of the reason for this was silver’s price had become too high. The value of silver in a coin could be more than its face value.

 

Silver coins, bullion now collectables

Today, silver is a demonetised metal in that it is generally not used as legal tender to pay government taxes or for goods and services.

Silver coins and bullion still have a role to play, as collectables, as does the gold-silver ratio.

The ratio’s relevance was highlighted again in March 2020, when something remarkable happened.

The gold-silver ratio at the height of the Coronavirus pandemic hit 120:1 – its highest ever recorded.

The ratio is back down to 90:1, still very high by historical standards.

Any investor that sold one ounce of gold to buy 120 ounces of silver in March 2020 could theoretically be sitting on a 25 per cent profit several months later.

Anthony McClure, managing director of ASX-listed Silver Mines (ASX:SVL), said supplies of physical silver were hard to come by and could explain the ratio’s take-off.

“It’s bizarre, there is no physical metal available,” he told Stockhead. “You can’t go into the Perth Mint or any other mint and buy silver. In that environment, you’d expect the price to rise.”

The volatile swings in the silver-gold ratio are an opportunity for some traders.

They may also illustrate that silver is relatively undervalued compared to gold.

Could it be that silver is again becoming a monetary metal akin to gold? Time will tell.

 

Silver’s role in medicine, industry

Silver has a myriad number of uses in medicine because of its anti-microbial qualities and in industry due to its electrical conductivity and anti-tarnish properties.

The white metal is sprayed as a thin film on computer discs, and silver nitrate is used in medicines.

Stained glass is coloured yellow or orange by silver, and silver-coated ball bearings are a key component in aero engines.

Silver has been used by NASA in an ionised form to purify water for astronauts, and the metal has other uses in photography, solar panels, and in motor vehicles.

Industrial, medical and clinical uses account for up to half of silver’s production, according to the BullionVault website.

There is also silver jewellery and tableware, accounting for 20 per cent of the market.

Demand and supply for physical silver is fairly evenly matched, according to data from industry body The Silver Institute.

 

Silver supply and demand

Global supply of silver metal is forecast by the Silver Institute at 978 million ounces in 2020, including mine production of 798 million ounces and some recycled material.

Silver metal demand is expected to be 963 million ounces in 2020, with 475 million ounces going to industry and 215 million ounces taken by investors.

The physical silver market is therefore set to see a surplus of 15 million ounces in 2020.

Exchange-traded products are a complicating factor for the market. They are a financial instrument or investment product based on silver metal held in secure locations.

Typically, they do not allow investors to take physical delivery of the metal like some metals futures contracts.

When silver exchange-traded products are included, the silver market has a notional deficit of 105 million ounces in 2020, the Silver Institute said.

Holdings of silver in exchange-traded products reached a new high of 925 million ounces on June 30, equivalent to around 14 months of mine supply, the Silver Institute said in a report.

 

ASX silver stocks

Silver stocks are enjoying a timely revival as investors are drawn to the potential profit from trading in the grey metal.

Investors wanting to put some money into silver equities can go down two routes.

Pure play silver miners are few on the ASX and are one way for investors to stake a claim in the metal.

Silver Mines (ASX:SVL) is a dedicated silver play and owns the Bowdens project in NSW.

Bowdens is sitting on one of the world’s largest silver deposits, and a scoping study for the project indicates production of 3.4 million ounces per year of silver.

Manuka Resources (ASX: MKR), the first gold and silver IPO of 2020 is the other ‘go to’ silver play.

Whilst it is currently producing gold from its recently modernised 850,000 tonne per annum plant at Wonawinta in the prolific Cobar Basin, it is forecasting first silver production in Q2 2021 and expects to be producing 2 million ounces of silver per annum from its 52 million ounces silver resource.

Alternatively, investors can pick from a large number of miners that produce silver alongside other metals such as copper or gold.

There are around 30 ASX companies that have interests in silver.

 

Large cap silver miners

They include some larger miners such as South32 (ASX:S32), which mines silver at its Cannington site in Queensland, producing at a rate of 3 million ounces a year.

Sister company BHP (ASX:BHP) has some silver production from its Olympic Dam mine in South Australia that is better known for its uranium-copper output.

Smaller Australian-listed miners, meanwhile, provide a wider choice of silver projects for investors.

 

Small cap silver miners

Brazil-focused silver explorer BBX Minerals (ASX:BBX) has identified silver in a precious metals complex of exploration tenements in the southern Amazon region.

The company has secured an $8m standby facility with a US institutional group to advance work on a metallurgical test plant for its Brazil project.

WA-based Pacifico Minerals (ASX:PMY) is developing the Sorby Hills lead-silver-zinc project in WA, which has a measured resource of 7.1 million tonnes at 6.1 per cent lead equivalent (4.3 per cent lead and 57 grams per tonne silver) and 0.4 per cent zinc.

Meanwhile, White Rock Minerals’ (ASX:WRM) portfolio includes the Mt Carrington gold-silver mine in northern NSW.

The company has so far defined a shallow indicated and inferred resource totalling 341,000oz gold and 23.2 million ounces of silver.

Rimfire Pacific Mining’s (ASX:RIM) Sorpresa project in the East Lachlan Fold Belt of NSW hosts silver along with its gold resource.

A maiden JORC 2012 compliant resource of 6.4 million tonnes at 0.61g/t gold and 38g/t silver for 125,000 contained gold ounces and 7.9 million contained silver ounces was released in December 2014.

Investigator Resources (ASX:IVR) owns the Paris silver project, a potential 1-million-tonne-per-year mine, which the company says is the highest grade non-by-product undeveloped silver project in Australia.

Paris contains a resource of 9.3 million tonnes at 139g/t silver and 0.6 per cent lead for 42 million ounces of contained silver and 55,000 tonnes of contained lead.

Anything over about 50g/t is generally considered high-grade when it comes to silver.

“Australian dollar gold has continued to strengthen, with volatility, during the COVID pandemic and, if we see the gold-silver ratios retreat from the current level of historic highs of up to 120, the Paris silver project will become a very exciting opportunity for Investigator,” managing director Andrew McIlwain said.

Adriatic Metals (ASX:ADT) is advancing the Vares polymetallic project in Bosnia & Herzegovina.

Phase-two metallurgical test work has shown the project can produce concentrate grading 25.1 per cent copper and containing significant quantities of payable gold (20.9g/t) and silver (9,550g/t).

Adriatic has secured environmental approval for the project.

Mithril Resources (ASX: MTH) will carry out drilling at its Copalquin gold and silver project in the west of Mexico after raising $3.5 million from investors.

Copalquin is home to more than 32 historic gold and silver mine workings and is within the Sierra Madre gold-silver trend that hosts Coeur Mining’s Palmarejo and Agnico Eagle’s Altos mines.

Historic drilling data shows the Copalquin project has multiple high-grade hits including, 17.77m at 45.16g/t gold and 118.2g/t silver from 31m at the El Cometa mine, and 4.5m at 28g/t gold and 2,350g/t silver from 138m at La Soledad mine.