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The ultimate guide to investing in silver

14 September 2021

Tuesday 14 September 2021

Silver is money
Create your own gold to silver ratio

Dear Investor,

Silver — often called the ‘other’ precious metal — is easily forgotten about.

Shae Russell,
Group Communications Manager

Let’s be honest, the gold price moves are often more exciting than silver.

There’s been times when gold can move US$100 per ounce in an hour! Plus, when gold hits new highs, it’ll be all over the news.

In contrast, silver would be lucky to move a buck or two over the same period.

Don’t get me wrong, there are times when silver can make some extraordinary price moves…it’s just that large moves from silver are rare in comparison to gold.

The lack of volatility — or excitement — is one of the reasons why silver doesn’t get the same amount of coverage as gold.

But don’t let that deter you, because silver is a very important precious metal.

Not only is it beautiful, it’s useful and it’s low price point is an excellent entry into the world of investing in precious metals…

Silver is money

Like gold, silver is money.

In fact, monetary historians will often point out that gold only became money because of silver.

While the Lydian Empire (modern day Mansia, Turkey), were the first people to use a coin system in their economy, the Athenian Empire popularised the coin system but with silver instead of electrum.

(Incidentally, the Roman Empire copied the Athenian coinage system with but with gold. Making the Romans the first to introduce a gold standard…and also the first government to debase their currency. The Athenians on the hand, refused to follow suit when times got tough. But we’ll save that story for another day.)

Importantly, for several millennia economies have adopted precious metals for use in their monetary system. And the majority of these countries, silver has been at the heart of it. Bolivia, India, Spain, China, and Germany have a history of silver standards.

Yet it was only at the start of the 18th century that Sir Isaac Newton introduced a mashup of the gold and silver ratio. Popularising one form of money to hold (gold), and one form of money to circulate (silver) as the money supply.

1oz Silver ABC Bullion
Eureka Minted Coin

Newtown formally fixed the gold to silver ratio at 15.5:1 in 1717. That is, it would take 15 ½ ounces of silver to buy one ounce of gold.

This is where the name ‘pound sterling’ came from.

By fixing the gold to silver ratio here, Newtown actually devalued silver. From 12th century to the 17th century, the commonly accepted gold to silver ratio was 12 silver ounces to one ounce of gold.

The secret to Newtown’s method, however, was less about the value of silver, and more about protecting the Crown’s gold position. In fact, this weight fixing backfired. The currency debasement led people to think silver was undervalued and hoarded it…

A century later and the US was tinkering with their own fixed gold to silver ratio. Setting similar weights with similar hoarding outcomes.

In the many centuries since, there’s been rigorous debate about what the ‘correct’ gold to silver ratio is.

Some hypothesise a ‘natural’ gold to silver ratio is 17:1, as silver is 17 times more abundant than gold in the Earth’s crust.

Others say a true gold to silver ratio should reflect the mining rate. For every ounce of gold mined around the world, on average nine ounces of silver are mined. Therefore, the theory goes, the market should value the ratio at nine ounces of silver to one ounce of gold.

Regardless of what people think it ‘should’ be, a fixed ratio of gold to silver ended with the creation of the US Federal Reserve, leaving the market to determine silver’s worth against gold…

Gold to silver ratio
1915 - 2021

Source: Macrotrends

You’re looking at the ‘worth’ of silver against gold over the past 105 years.

As you can see, decoupling from the gold standard increased the volatility in the gold to silver ratio. In that time, the ratio has been as low as 18 and as high as 120. Yet, throughout history it hasn’t mattered with silver’s price has been fixed or free floating ratio.

The point is that silver — alongside gold — has maintained it’s position as being a key store of wealth.

Create your own gold to silver ratio

The most important point isn’t what the gold to silver ratio should be. To date no fixed ratio has worked within economies.

What we have learnt however, is that silver is a long term investment which compliments gold. And you can create your own gold to silver ratio.

At roughly AU$32 per ounce, you can buy one ounce of silver and get change back from a 50 buck note.

For people new to bullion, silver makes an excellent ‘entry’ point into precious metals. You can pick up a handful of ounces and slowly adapt to the psychology of owning precious metals.

But more to the point, how much silver should you own? This is where it comes down to who you are as an investor.

Some investors prefer to only buy silver, believing it’s undervalued. However prudent investing means not putting all your eggs in one basket.

ABC Bullion
1 kilo silver bars

Rather, I suggest all investors look at a more balanced approach and combine both gold and silver in their precious metal portfolios.

For example, when I first started investing in precious metals, I opted for 90/10 approach. That is, I had 90% of my precious metals total value in gold, with 10% of its value exposed to silver.

This would be considered a conservative approach.

In recent years I’ve grown more bullish on silver, and now I follow something similar what Peter Schiff suggests, which is two thirds in gold, one third in silver.

Schiff’s suggestions will leave you highly exposed to moves in the silver price, and should be treated as a more aggressive silver investing strategy.

When you set out to create your own gold to silver ratio, the most important thing to remember is what are your financial goals. No investment is worth losing sleep over.

Until next time,