Silver is much cheaper than anyone realises

Severe under-valuations of base metals priced in gold point to far higher prices for them when they normalise. This is driving a significant rerating for silver.

Summary and conclusion

In this article I examine the prospects for silver relative to gold, not from the customary gold-to-silver ratio but on the assumption of its use-value as an industrial base metal. I find that the entire base metal basket is more undervalued than it has ever been in gold terms since 1900, and almost certainly during the industrial revolution when base metals began to be more widely used.

Acting as an industrial metal with no monetary premium, silver appears to be in the earliest stages of correcting this severe undervaluation, outperforming its base metal peers at a time when the purchasing powers of the dollar and other G7 currencies are beginning to decline at an accelerating rate. The bullish case is fully justified, and almost certainly silver’s price potential relative to gold and in fiat currencies is greatly underestimated.

The historical background

It is over 150 years since silver was valued as metallic money, when Germany and other European nations abandoned it as their monetary standard in favour of gold. Ever since, silver has been valued as an industrial metal, more in common with base metals than gold.

The price of silver still has a long way to climb before it can be said to reflect any value as metallic money. Silver bulls have its history of monetary status as their lodestar, but on close examination it is even undervalued as an industrial metal, a position which it is only starting to correct.

Before we consider why this is so, we must first assess the prospects for gold. Gold bugs are unequivocally bullish, but they always promote positive evidence for their cause. Perhaps their cheerleading suggests that their vociferous bullishness is overblown and a correction to shake out flaky bulls is overdue.

But we should bear in mind that in the wider investment context precious metal enthusiasts are actually in a miniscule minority. It’s estimated that investment funds globally amount to about $270 trillion (MSCI, 2023), the bulk of which are regulated, and physical gold is not a regulated investment. Physically backed gold ETFs which replaces bullion, technically not actually gold but gold substitutes, total 3,445 tonnes currently worth $370 billion which is only 0.14% of total investment funds.

Of course, there are unknown quantities of unrecorded bullion held. These are inactive holdings as part of personal wealth held outside the investment industry’s statistics. The point is that globally gold is hardly owned at all in regulated portfolios, and the global investment industry has yet to invest.

Despite this, gold has risen substantially in recent years, priced in declining fiat currencies. In conventional terms, we would say that investors have yet to pile in, certain to drive gold far higher. But that wrongly assumes that gold is an investment. The error is to compare incorporeal credit instruments such as currencies and derivative investments with corporeal money in common law without counterparty risk. The true relationship is actually one of an escape from credit into security; and credit includes fiat currencies issued by central banks as government departments.

The correct way to regard gold is as the ultimate hedge against currency risk. Therefore, the currency quantity per gold ounce as the way to describe the relationship should be expressed the other way round, which is actually how gold standards were always expressed in law.

Therefore, by inverting the familiar gold chart, we can illustrate the true relationship: