Silver has long been valued as a precious metal, and it is used to make ornaments, jewelry, high-value tableware, utensils (hence the term silverware), and currency coins. Silver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value.
However, since the end of silver standard, silver has lost its role as legal tender in many developed countries such as the United States. Currently, the main demand for silver is for industrial uses and medical applications
like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity, and demand fluctuations between industrial and store of value uses. At times, this can cause wide ranging valuations in the market, creating volatility.
Relation between Silver & Gold
Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver ratio is often analyzed by market participants. In 1792, the gold/silver ratio was fixed by law in the United States at 1:15, which meant that one troy ounce of gold would buy 15 troy ounces of silver. The average gold/silver ratio during the 20th century, however, was 1:47. The lower the ratio/ number, the more expensive silver is compared to gold. Conversely, the higher the ratio/number, the cheaper silver is compared to gold. Currently, this ratio stands at 1:53.
From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per ounce but reaching $14, for the first time by late April 2006. The monthly average price of silver was $12.61 per ounce during April 2006, and the spot price was around $15.78 per ounce on November 6, 2007. As of March 2008, it hovered around $20 per ounce. However, the price of silver plummeted 58% in October 2008, along with other metals and commodities, due to the effects of the credit crunch. By April 2011, silver had rebounded to reach a 31-year high hitting $49.21 per ounce on April 29, 2011 due to economic concerns about inflation and uncertainty regarding bailouts in the Euro zone.
Silver, like all precious metals, may be used as a hedge against inflation, deflation or devaluation. As explained by a U.S based portfolio manager in September 2010:
“The currencies of all the major countries, including ours, are under severe pressure because of massive government deficits. The more money that is pumped into these economies – the printing of money basically – then the less valuable the currencies become”.