We fully expect that we will live in a changing world in coming years. We expect that the monetary system will see some big changes that eventually involve the US dollar losing its status as global reserve currency. While this change is a valid reason for people to consider owning some insurance in the form of hard assets like precious metals, there is also a reason to think about using silver for that insurance. This Bloomberg article talks about it.
This Bloomberg article talks about how solar power will become the #1 source of electricity in the US by the year 2050. That's a few years away. But interestingly it also notes that by the year 2016 solar power will be price competitive for electricity in 47 of the 50 states. This is why silver can be a good way to put away some hard asset insurance for the long term.
Silver prices are volatile in the short term and tend to move very sharply. For this reason, trying to use silver as a form of insurance by speculating on it short term is a bad idea. But for the long term, it can make a lot of sense. Silver is not currently priced all that high per ounce given its reasonably tight supply and demand fundamentals. Demand for silver is increasing due to industrial consumption like the solar panels mentioned in this article and all forms of electronics. As the emerging markets continue to grow over time, demand for silver will only increase. It is used in everything from mobile phones to cars to flat screen TV's to various medical devices.
On the supply side, there is surprisingly little above ground silver inventory around the world (far less than there is gold). Silver is mined mostly as a by product of other metals. Mining expansion is starting to decline due to several factors. Low prices make it harder to mine at a profit. Easier to mine deposits are mostly mined now and new deposits are going to be much more costly to access in coming years. This is going to impact supply over time even as demand continues to grow in coming years. There is far less than one ounce of silver available for each person on earth above ground. And digging up more to fill the need is going to cost much more in the future.
Silver is certainly a metal that has investor demand as well. It is viewed sort of like poor man's gold in times of uncertainty. If there were another financial crisis like Jim Rickards predicts, many people who cannot afford gold would probably turn to silver. But the good thing about silver is that even if there is no new financial crisis, the future supply/demand fundamentals make it a very low risk asset to hold for insurance purposes. You don't have to buy silver and hope for some kind of crisis to unfold. A global economic recovery would also be very positive for silver.
Most people can afford some silver to hold long term for a hedge type of insurance like Jim Rickards and many others recommend. And they can reasonably expect that in coming years it will increase in price due to increasing demand vs. stagnant or falling supply. It seems to offer a low cost and low risk way to hold some insurance. If this Bloomberg article is correct, it will be extremely low risk at current prices.
Added note: Be sure to catch the next three posts we will be doing here on the blog as a followup to the US election results. These next three posts go together as kind of a series where we look at how the election might impact the pace of monetary system change. They will appear here on Sunday, Monday, and Tuesday. They will be filled with a lot of useful links and information.
Update 11-18-14: King World News runs this interview about silver demand that supports the information above.
Update 11-20-2014: And here is another good article on why silver makes sense.
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