Post 4: Why writing will make you a BOSS at learning!

Before this summer school semester at MGA, I spent a few days a week applying for scholarships. 

Usually for each scholarship I would have to write a 500-1000 word essay on something that they specified. 

The first scholarship I applied for was the American Bullion Scholarship with $1000 up for grabs! 

(Totally recommend you apply for scholarships like these btw)

In the essay I had to write, I had to write about “Which will perform better in the next metals rally, Gold or Silver?”

Now I was definitely no expert on the price movements of gold or silver. However I do love to learn about investments (as you can see in my blog) and I also figured that writing about them would be a fantastic way to learn about them! Turns out I was right:)

I took it upon myself to learn about the variables that would affect the price patters of these commodities. After I searched the web for about 2... minutes, I started typing. I used my favourite tactic of writing by throwing isht at the wall and seeing what sticks, to put it bluntly.

Turns out that through the process of writing, questioning & researching, writing, questioning & researching, over and over while constantly checking to see if my essay was convincing and made sense, I learned SOOO much about what affects the prices of these commodities and ended up putting together a pretty convincing essay on this topic. (You can read my essay below this article if you want:)

This shows me from my own experience, that simply being given an incentivised task of writing, or even just writing in general, can help HUGELY in your own learning. 

It forces you to constantly question your own thinking and knowledge, since you are articulating and making sense of your ideas in the real world on physical paper/document. 

Moral of the story:
If you want to learn something well, (like I love to do in my blog) write about it!!!  (mind-blown)

Gold vs Silver

The question of "Which will perform better in the next metals rally, gold or silver?" is an ambiguous question that I'll define for myself. Let’s first assume that "perform better in the next metals rally” means largest percentage increase from now until the highest peak within the next 10 years). Now that I have defined the question, I’ll break down why Silver will “perform better in the next metals rally”.

Paradigms

Humans have perceived metals like Gold and Silver to hold economic value for thousands of years. After all the use of Gold as currency dates back to 600 B.C. in Turkey. As well as Silver over 4000 years ago in ancient Greece, however historically gold has generally turned out to be the most popular currency of choice. It is evident that throughout history up until now, there has been a well agreed upon paradigm developed and entrenched in the minds of humanity that these metals provide economic value. But how logical is this really?

The main motivation for the layman to buy Gold or Silver is because he believes that he could sell it for a decent price later on, which, if you’ve paid attention to that statement, is the definition of speculation. Real economic value is based on its level of utility in our current economy matched with its supply and demand.

 

Utility

Silver provides much more practical utility than gold. Currently 12% of Gold supply goes to industrial uses vs 56% of Silver supply. Gold is a very useful as an efficient conductor and can be found in cell phones and televisions, however it is not as conductive as Silver, which is the most efficient conductor in the world.

There are so many applications for Silver that you typically don’t go one day without using a product that contains it. Silver is specifically used in medical applications, batteries, dentistry, glass coatings, LED chips, medicine, nuclear reactors, photovoltaic energy, semiconductors, touch screens and water purification to name a few, all of which are increasing in demand. “Of all the elements, silver is the indispensable metal. It is the most electronically conducive, thermally conductive, and reflective. Modern life, as we know it, would not exist without silver.” says Mike Maloney in his book “Guide to Investing in Gold and Silver”.

Additionally to this, a lot of Silver waste is created by production companies as it is non-economical to recover. It is estimated that 90% of Silver mined throughout history has been lost to waste unlike Gold where almost 100% remains intact today. Silver also eventually tarnishes unless protected in a dry place from the elements unlike pure Gold.

 

Demand

Global demand for both metals has been increasing over the years, but If you break down where the demand is coming from, you will get a clearer picture of which metal is the most valuable to our progressing economy.

Here are a few rough numbers representing the distribution of global Gold and Silver demand in 2017/2018 to get an idea of what metal would be more valuable.

Gold demand:   (2017 Statista)                        

Dentistry – 1%.                            Silver demand:   (2018 World Silver Survey)

Central bank purchases – 5%.  Silverware – 3%

Jewellery – 52%.                         Jewellery – 13%

Bar and coin – 26%.                   Bar and Coin – 16%

Industrial – 15%.                         Industrial – 67%

 

I would bet on a metal that the world largely depends on for Industrial production, giving us better energy, batteries, medicine, light and water purification pushing our society forward, than one that mainly provides us with jewellery.

 

Supply

The global Government Silver supply has reduced from over 350M ounces in 1970 to under 50M estimated in 2018 mainly due to the fact that Silver is no longer used as coinage. In contrast, global Central Banks are estimated to hold over 1B ounces of gold in official reserves and are still buying every year. Matched with this, global Silver production looks to have peaked in 2014.

Not only is Silver ever-increasing in industrial demand, there is much tighter supply compared to Gold which seems like a setup for a major price swing.

 

Volatility
If you view the 30 year price charts for gold and silver, they are close to being identical other than the fact that the silver chart appears to be stretched vertically.
This can be explained by how the market for Gold based on price is 16x bigger than Silver. This is why it takes only a relatively small amount of money to have a greater impact on its price. This fact supports the evidence from the charts that silver has been, and is naturally, more volatile than gold and therefore is likely to bounce higher on a percentage basis than gold during a metals rally. Here are historical stats on the volatility of the two metals...
1970 low to 1980 high:  Gold. 2328%,    Silver. 3105%
1980 high to 1985 low:    Gold. -66.5%,    Silver. -89.1%
2008 low to 2011 high:  Gold. 166%,      Silver. 448%
2011 high to 2016 low:    Gold. -44.6%,    Silver. -71.8%

 

Conclusion

If there was a global paradigm shift where prices of Gold and Silver reflected their levels of essential usefulness in our society as well as their scarcity, I know which metal would perform as an investment much, much better. Although it seems unlikely that this will happen anytime soon, we are living in the age of accelerating change where people really could realise where the true value is. Economic value to humans derives firstly from what people need, and then what they want.

 

Even if we turn away from the idea of intrinsic value and make a more comfortable prediction based on history, it is with confidence that I predict that silver will still “perform better in the next metals rally” because of its added volatility.

Of course, there can never be complete certainty over what the price of Gold and Silver will do, but based on my research, I know which wave I would rather ride.