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Why Is Silver So Cheap?

The poor man’s gold. That is how silver has been referred to for a couple of hundred years. And when we look at the gold/silver ratio, it is not difficult to understand why. At the time of writing of this article, the gold spot price fluctuates at around $1900 a troy ounce, while silver’s at the $24 margin. Both are performing really well compared to historical prices. Nevertheless, one ounce of gold cost almost 80 times as much as an ounce of silver.

Silver Bullion

And this price range is not only true for gold and silver. Platinum started 2022 at $960 and is close to $1100 as of February 18. Palladium keeps soaring above the $2300 margin, after nearly reaching the price of $3000 for a troy ounce in may of 2021.

While all those four precious metals are sold as bullion around the world, why is silver so cheap compared to the others? There are many reasons why, but one thing is for sure: it has nothing to do with visual appeal. In fact, it would be very difficult to an untrained eye to distinguish between silver, platinum, and palladium since these former two have a silver-like appearance as well.

In this article, we are going to attempt to answer this question. And to understand how the silver spot price got to what it is today, first we have to learn about its history.

Silver History

Since the initial centuries of organized society, silver was used as a bartering item and eventually used to create coins, mainly for army funding and tax purposes. At around 3100 BC, during the first Egyptian Dynasty, the Menes code established that “one part of gold is equal to two and one-half parts of silver in value”. That is the lowest registered account of the gold-silver ratio in history.

Millenniums later, the Roman Empire set the ratio at 12:1. Throughout the following centuries different countries in Europe set varied, but similar, conversion rates between gold and silver. 

Across the Atlantic Ocean, the newly independent United States of America passed the Coinage Act of 1792 establishing bimetallic gold-silver standards and a fixed ratio at 15:1.

But different factors contributed to variations in the silver price in the US and the world through the 19th and 20th centuries as central banks desperately tried to regulate the price of silver and gold, the two base metals in the economy of many nations at the time.

Arguably the first global factor that contributed greatly to the collapse of the silver market was the Franco-Prussian War of 1870-1871. Prussia won and demanded 5 billion gold francs from France as bribe payment. This sudden surge of gold in the country made them switch from the German Thaler (silver) to German Mark (gold). Many governments around the world with silver-backed currencies decided to halt silver production in their mints in the years that followed.

Silver History in the US

In the United States, after the Civil War, mining companies found massive quantities of silver in Virginia City, in Nevada, Leadville, in Colorado, and in the region of Coeur d'Alene, in Idaho. Freshly mined silver overflew the market with supply, causing an eight-fold increase in gold prices, while silver prices dropped.

That economic instability brought about a significant inflation period. It then led to a division in the country between those who wanted the inception of a gold-only standard to control the inflation rate, against silver investors who still defended the free coinage of silver.

Seeing that the economy could not sustain a currency backed by the two metals, the US Congress passed the Coinage Act of 1873, which would temporarily remove the country from the silver standard and keep gold as the US Dollar primary metal.

In only a few years, new legislation warfare would follow in the late 1870s and early 1880s which brought silver back as commodity money. The United States would only adopt an entire fiat currency system in 1971.

Then, why is silver so cheap today?

But why does silver remain a cheap metal and the gold-silver ratio keep stretching? There are a few possibilities and we are going to analyze them below.

The Value of Gold x Silver

First, we need to understand that silver is always under the shadow of gold, which is more consolidated as a safe investment and a better symbol of wealth and fortune.

Throughout history, gold has always been seen as the rarer and more valuable precious metal. The difference in price remained relatively stable for centuries. It was only after the US Civil War, with the demonetization of silver, that we started to intervene in silver prices via the price discovery process.

That led to a series of fluctuations in the last century and a half. And any time we see a spike in gold prices during periods of financial instability and debt crises, we might see more fluctuations in the gold-silver ratio. And that leads us to the next reason.

Historical Gold/Silver Ratio

Society's view on the value of silver

When we compare silver to other precious metals, the first thing that comes to anyone's mind is that silver is considerably cheaper. You can buy much more silver than gold, for instance, with the same money invested, as we have seen in the previous topic. That is a known fact, even for people who are not familiar with the precious metals market.

It is hard for silver to break through the gold-silver ratio simply because people expect silver products to be much cheaper.

Silver demand

With the ending of all silver-backed currencies in the world, physical silver remained as a commodity and an investment asset, much like other precious metals. Nowadays, there is a considerable demand for silver for industrial uses, especially with the advent of modern technology.

Silver is a highly conductive precious metal and can be used to increase energy efficiency in electrical applications. Long-life batteries, solar panels, superconductors, circuit boards, to name a few, are examples of how silver can be used to enhance electrical conductivity. We can find silver in construction sites, industrial buildings, automobiles, water filters, and even on the computer or mobile device you are reading this article. When industrial production is high, that brings about a positive impact on silver prices.

Needless to say silver is an essential metal for the jewelry industry. It is a malleable metal and very resistant to oxidation. Because of its scarcity and brilliant white color, silver jewelry is ever popular and present in fashion. The same goes for ornaments and even fine dining cutlery.

Finally, since the introduction of a full fiat-based system in the United States in 1971, investors have been seeking out precious metals as a way to hedge against inflation, speculating through the price discovery process. This led to the creation of private refineries around the world that sought to produce pure physical silver to meet the investment demand. Not only that, but government-owned mints also realized a potential for profiting over their silver reserves and started producing silver bullion coins. Now, investors can find physical silver in different forms, such as silver bars, silver rounds, and silver coins.

The United States produces every year, arguably one of the most notable silver bullion coins in the world, the American Silver Eagles.

On the other hand, ever since the ending of the silver standard, the demand for this precious metal is not as high as it used to be. At least, not enough to out demand the existing supply. And thus, silver remains a cheaper precious metal.

Relative rarity

Despite being a precious metal, silver is not really as rare as gold, platinum, or palladium. In fact, according to the latest estimates from the World Gold Council, more than 1.9 million tons of silver has been mined throughout history, against only slightly more than 215,000 tons of gold. Moreover, experts estimate more than 580,000 tons of silver ore still untouched on the crust of the Earth, while only a tenth of that remains of gold. Because a greater supply exists, that translates to the difference in price between the two metals.

Silver/Gold Mine Production

See more on this subject in our article "how much gold and silver is there in the world?"

Inflation

If you seek out an expert for investment advice in these current times, do not be surprised if they recommend adding some amount of silver content to your investment portfolio. Bullion investors often seek out precious metals when the market is in a low-interest rates environment. On the other hand, it could be possible to capitalize on it before market trends shift to higher interest rates.

That is why inflation can play such a big part in determining the price of all precious metals. When the U.S. Dollar is not performing well, we might see an increase in bullion prices, including silver. The same goes for the other way around. Many experts suggest using silver to limit any related risks to inflation and fiat currency devaluation.

Government-Owned Silver

Many countries worldwide own gold as financial reserves. But they also used to store silver. However, that changed with the ending of the silver standard. Hardly any countries nowadays have considerable amounts of silver deposits. The United States, for instance, sold off most of their silver deposits after the Coinage Act of 1965, which removed silver from circulating coin's compositions.

Nevertheless, the United States still buys significant amounts of silver every year for the production of silver bullion coins by the US Mint. Those include the American Silver Eagles, as mentioned before, along with other commemorative and proof coins. Naturally, the purchase of silver and production of US Mint coins can affect the price of silver, with respect to basic laws of supply and demand.

In addition to that, the US Mint still serves as a custodian and is responsible for safeguarding most of the country's gold and silver reserves. According to the last Mint Report, the amount of silver under their custody by September 30, 2021, was over 7 thousand troy ounces, with a market value of over 150 million US Dollars in deep storage. And almost 9 thousand troy ounces, worth close to 200 million US Dollars in working stock.

American Silver Eagle ObverseAmerican Silver Eagle Reverse

The Importance of the Gold-Silver Ratio for investors

Gold/Silver Ratio

The Gold to Silver Ratio is a dynamic moving amount of silver that can be theoretically bought by a fixed amount of gold in the same unit of measure. For instance, how many grams of silver it is possible to buy with 1 gram of gold, or, more typically calculated in western countries, how many troy ounces of silver one can purchase with one troy ounce of gold.

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Modern-day bullion investors and traders use the fluctuating Gold Silver Ratio to analyze and choose which precious metal might outperform the other. According to the outlook of the ratio, investors might be more inclined to buy silver, rather than gold, or vice versa.

That can cause a spike or fall in demand for both metals, ultimately influencing their prices.

Conclusion

Nobody can really tell how the price of silver will fluctuate in the future. You can analyze the gold-to-silver ratio, equity markets, and the interest rate in savings accounts from medium to long terms, and still, things can turn out to be different than expected.

What we can state, for sure, is that currently used silver is not enough to stretch the existing supply and increase the price of silver to the same level as other metals. And that is the real answer to the question "why is silver so cheap?"

FAQs

Why do silver prices stay so low?

Mostly because of the existing supply. There is still a considerable amount of silver to be mined and also from scrap metal. On the other hand, demand is not as high as it used to be, since the ending of the bimetallic standard worldwide.

Is silver really worth buying?

Precious metals are traded as investment assets and silver is cheaper than any other metal used for that reason. It is possible to assume that purchasing silver, even in small quantities, could constitute a sensible entryway into the bullion market and a portfolio diversifier to potentially avoid debt crises.

Why is silver worth so much less than gold?

First, silver is not as rare as gold. There is much more silver yet to be mined on the crust of the Earth than gold. Also, value can be a matter of perspective. People tend to value gold more than silver, hence the difference in prices.

Will silver ever be expensive?

Silver prices tend to go up during times of economic uncertainty. Precious metals' value increases because savvy investors purchase them as a way to hedge against inflation and fiat currency devaluation. Nonetheless, it is too premature to suggest that silver prices will ever be as expensive as gold, platinum, or palladium.

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Chase Turner
Chase Turner
Director

Chase has been buying and selling gold, silver and platinum since 2009, when he opened a local gold shop. He fell in love with buying gold and silver bullion after learning how the world monetary system works and has been an avid believer and preacher of hard assets ever since. 

He has worked in various levels and sectors within the precious metals industry and has consulted thousands of precious metals investors on the best way to buy and sell bullion at all levels.

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