How cheap is silver?
Well, if you’re measuring it against gold, silver has never been this cheap. The gold/silver ratio recently exploded past 120. Theoretically, that means you could buy 120 ounces of silver for one ounce of gold.
An average gold/silver ratio is about 70, and it has been as low as 15.
120 is unheard of. This has never happened in all of human history.
Admittedly, the gold/silver ratio is not foolproof
You could argue that gold is too expensive, and that’s why silver looks cheap.
However, in U.S. dollars, gold is still well below its 2011 high. Now, it looks like we’re heading into a similar financial crisis. Central banks are printing trillions more currency than during the last recession.
If anything, I believe gold is also cheap.
It’s just that silver is really, really cheap.
You could also argue that silver is an industrial metal and won’t be in high demand through a recession.
But like gold, silver has been used as money since the ancient times. When gold rises, silver tends to play catch-up with parabolic moves.
During the last financial crisis, silver shot up nearly 400%.
Meanwhile, silver is capitalizing on many growing trends. It’s the most conductive metal, making it vital for electric technologies. Solar panels also account for its largest industrial demand.
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If you want to buy physical silver, good luck
You can’t find it anywhere.
From what I can see, dealers haven’t a single ounce to sell. And because of the coronavirus, many of the major mints are closing, too.
With such desperate silver shortages, you might be wondering: “Why are prices so low?”
I believe silver’s spot price was pushed down by paper-traders who needed cash as stocks plunged. They weren’t selling physical silver but paper claims to silver.
If you want the real thing, you can expect to pay double the spot price — if you’re lucky.
As more people demand genuine silver, prices must surely rise.
Silver miners are digging up real, hold-in-your-hands silver
When prices move, even a little, it has a dramatic impact on silver miner’s profits.
Suppose it costs a miner $8 to dig up one ounce of silver. They can sell that ounce for $10. That’s a $2-per-ounce profit.
Now, what if that price went up 100% to $20?
The miner’s margin would jump to $12 — a profit boost of 500%!
This is why, if you believe precious metals are going up, miners are so compelling. You get even more leverage on the price.
Why I’m watching Pan American Silver
Mining companies are notoriously volatile.
You want to own large, well-run companies, with solid balance sheets and low mining costs. That way, you shouldn’t need high silver prices. You can hold onto your shares while they’re cheap.
Pan American Silver is the second-largest primary silver producer, with a $5 billion market cap and well-diversified assets across Mexico, Canada, Peru, Argentina, and Bolivia.
Its Escobal mine is one of the largest silver deposits in the world, with an estimated 264 million ounces of reserves.
And it doesn’t just mine silver. Extra revenue is generated from gold, zinc, lead, and copper.
Its balance sheet looks strong. Debts are a conservative 0.12 of assets, with $282 million in operating cash flow.
At 1.44 times book value, shares aren’t exactly at bargain-basement levels. However, it’s a solid, well-run company that I’d be happy to hold long term.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Alex Busson has no position in the companies mentioned.