Geopolitical risks are generally in favor of gold, but the current speculation on the gold market is taking on such proportions that investors are taking a closer look at the precious metals market. And recently, the smaller brother, silver, is getting more and more attention. The silver price, which has risen sharply in recent weeks and is creeping above $27 per ounce, already sounds exciting, even if you look back a few years. The course approaches the level of pandemic panic. But it is still far from the heights of the 2011 commodity market rally. In other words, there may even be perspective in investing in silver, especially since silver is historically very cheap compared to gold.
Advantages and disadvantages of silver being an industrial metal
The price of silver traditionally lags behind that of gold. But in recent weeks, we have seen a catch-up in the market. The silver price of $27.15 per ounce is a level not seen since the summer of 2021.
While the price of gold increased by almost 18 percent in the last 12 months, silver only increased by 9 percent. But if we look at this year’s performance, silver has performed better, as it has risen 17.5 percent so far this year, compared to gold’s plus 12 percent.
The global silver market has been suffering from a supply shortage since 2019. This is because silver is also an industrial metal. According to data from the Silver Institute, global demand for silver may rise by 2 percent this year, reaching 1.2 billion ounces. Industrial demand represents nearly 60 percent of the total physical silver demand, while the speculative and hedging demand of investment funds accounts for 30 percent. The remaining 10 percent belongs to the jewelry industry.
The nature of silver as an industrial metal is both an advantage and a disadvantage. For one thing, the price of silver is less dependent on investors’ general enthusiasm for precious metals. On the other hand, silver is highly dependent on the momentum of the global economy. Currently, the jewelry industry trend is uncertain, but the solar industry is booming worldwide. Manufacturers of photovoltaic systems account for 30 percent of the industrial demand for silver. While half of the jewelry industry’s demand is absorbed by India, that is, the demand of the populous middle class there is decisive. Especially since the price of gold has gone down, silver jewelry can play a bigger role in the wedding season.
That’s great, but there is a loophole
While investment gold can be bought and sold VAT-free in all EU member states, including in our country. The situation is quite different with silver. The VAT on silver in Hungary is 27 percent. There is a loophole, if the traders pass on silver bought back from private individuals, then the buyer only has to pay the VAT on the margin.
Last year, German investors also closed silver positions with losses due to tax burdens. At the end of 2022, the tax on silver imported from countries outside the EU was increased, and since 2014, the VAT rate has been 19 percent instead of the previous 7 percent.
It is no coincidence that investors prefer gold to silver.
Even King Midas morphed on the gold-silver price ratio
According to legend, whatever the legendary King Midas touched, it turned into gold. Still, the king was concerned about the correct ratio between the price of gold and silver. Well, he believed that 1 ounce of gold was worth 16 ounces of silver. In medieval Europe, the value ratio was already 1:7, simply because the silver mines on the continent were exhausted. Only the discovery of America and the silver of the Aztecs changed this situation, restoring the ancient proportions in several waves. The historical problem of gold and silver money was then superseded by the industrial age. Silver increasingly became an industrial metal, and although it did not cease to be jewelry and treasure, its demand adapted to production cycles. In the forties of the last century, gold and silver were already quoted at a ratio of 1:100. While in the period between 1968 and the first half of 2012, the historical data shows 53.5 as the average ratio.
The first crazy silver speculation came in the 1970s, when the Texas oil billionaires Hunt brothers decided to buy up the world’s silver reserves, thereby reducing the supply and driving up prices. The Hunt brothers bought the first 200,000 ounces of silver at a price of $1.50 in the early seventies, and when the bubble burst at the end of the decade, the exchange rate was already at $50. The last time the price rose to the $50 highs was during the 2011 spring silver rally. But a decade later a During the Battle of Wall Street, it was also suggested that silver could become a meme. At that time, the exchange rate was close to $30.
