Looking for a Silver Lining

Silver was first used as currency over four thousand years ago and its name is synonymous with the true value that can only come from a real-world commodity. Here we take a look at the history of this oldest of old-school currencies, explore how it is used today and let you in on the basics of making silver your own personal hedge against inflation.

Silver was first coined between 700 and 600 BC and, during the height of the Athenian Empire (5^th century) the ‘drachma’ was established as the first ‘international standard’ currency – used throughout Mediterranean territories.

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Silver Mining and Silver Rushes

Not surprisingly, the Athenians also had quite a sophisticated mining industry during the height of their Empire. Silver mining has been a major international industry for centuries, and has played a major role in territorial expansion, empire building, and international economics. Silver mining was one of the largest factors in the exploration of the Americas, most notably by Spanish Conquistadors. In, as early as the Sixteenth Century in Mexico, and coinciding with major North American gold rushes in the Nineteenth Century, a series of silver rushes encouraged western expansion. Silver mining during this time was especially profitable as many of the world’s strongest economies remained on a Silver Standard.

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Largest Silver Producers

Today, the largest silver-producing countries are Peru, and Mexico. They are estimated to produce nearly 35% of the world’s silver each year, and silver makes up a generous proportion of each country’s GNP. The Fresnillo mine located in Zacatecas, Mexico is the world’s second largest silver mine. In 2007, this mine produced over 33 Million ounces of silver; Mexico alone contributes about 15% of the world’s silver production per year, which in the same year was 670 Million troy ounces. Silver has been mined in the Zacatecas region since as early as 1546.

The World’s Largest Mine

The Cannington Mine, in QL Australia produces an estimated 40 Million tons per year, making it the world’s largest silver mine. Owned by BHP Billiton (the world’s largest mining company with$16B in profit, 2008) Cannington is considered the world’s most productive mine, generating an estimated 6% of the world’s yearly silver output. Additionally, the Cannington Mine is considered one of the world’s most cost efficient mines, as well as one of its youngest.

Silver and Gold

Silver lost substantial clout when it was replaced by the Gold Standard – first in Britain in the 18^th Century, and then in the US and most other economies in the 19^th century. Ever since, Silver has been priced in terms of dollar-per-troy  ounce, and a silver-to-gold ratio as well. In the last 10 years, Silver has effectively been exchanged at an average of 59.83 troy ounces (with very few outliers) to one troy ounce of Gold; versus the dollar, silver prices have actually increased by nearly 300%. Many attribute these effects to the concurrent rapid increase in gold values, and steady devaluation of the dollar. While silver and gold were traditionally “loosely tied” to one another – meaning that if the value of one increases, the other typically does as well – recent market conditions have have led to unique circumstances.

Silver and the Dollar

Recently, the trade value of Silver has shifted considerably. Today, Silver is at $14.11 per troy ounce. This is nearly thrice its $4.95 per ounce value in 2000; it is also 73% of its all time high of $19.39 (1980), when the infamous Hunt Brothers nearly cornered the world’s Silver market in an attempt to hyper-inflate the trade value. It is important to note that silver has more or less stayed steadily on the rise, enjoying a fate similar to gold.

More recently, however, in the last decade, central bankers of developed economies have worked together in order to depress the silver price with the aim of slowing down the pace of currency devaluation – mostly due to the surplus of US dollars (as a fiat currency), in the marketplace, and being held in foreign countries’ reserves. This collaboration by the US and those central banks holding billions of dollars in US Treasury bonds was deliberately aimed at pumping up the dollar in favor of silver prices.

It is estimated that this combined effort has depressed the value from nearly half of where it should be (around $25-28) per troy ounce based on the silver-gold ratio. In short, the lower the price of silver, the stronger the US dollar, as each are effectively valued against gold.

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How Individuals Invest in Silver

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Silver Mining Companies

Silver differs from gold in that it is still widely used as a raw material. Silver mining can be a very profitable endeavor, as silver is commonly used in many electronics products. Individual investors can decide to invest in a Silver Mining Company, just as they would invest in a company such as Ford or Apple. This is different than trading in simply the commodity’s price, because, while the price of silver does play a role in the success (in the form of increased margins) of the company, there are other factors which contribute to the profitability of a company, and consequently the value of its stock. Additionally, if the value of silver decreases rapidly (as it did during the last six months) this can cut into a company’s profits considerably.

Exchange Traded Funds

The most popular consumer silver investments are exchange traded funds. (ETF) The value of an ETF reflects the value of held assets – bonds or stocks – and trades at the rate (as a derivation) of the net asset value of the fund’s net asset value. Tracked on various indexes, ETFs are accessible and are traded in the same way as common stock. They are relatively cheap and tax-efficient.

For the casual investor, ETFs offer an entry into the silver market without having to either own silver or invest in an individual mining company. Ownership of these types of funds is the same as ownership in other types of equities that can be traded and sold on a dynamic basis. Of course, because these funds are meant to represent only the cost of silver, their stock changes throughout the day, and can change on a dime.

Why People Invest in Silver

Many tend to invest in silver in lieu of, or in addition to gold. Because silver tends to mirror the ups and downs of gold, it can serve as a good alternative. You’ll incur about the same risk but it can be much more cost effective. Of course it must be noted that the market is not always allowed to run its course – because of the rapacious demand for gold, silver has lost some of its relative value, while the international financial community has also contributed to suppressing silver growth rates.