Though a precious metal, silver is an important industrial one, as well. Investors drove the metal’s price down sharply in 2008 expecting that reduced industrial demand would cause a surge in unsold supply of the metal. This made sense: more than half of total silver demand is industrial, as the metal is employed in such things as brazing alloys and solders, electrical application, and electronics, and it is used heavily in the solar panel industry. In recently discovered applications, silver is being used in new battery technology for smart phones, laptops, and tablets, as well as in creams, bandages, and powders in the medical sector. Since the metal inhibits fungal growth, silver is also being used in new ways to disinfect water, and in food packaging and refrigerators. Silver has important industrial applications that have been growing each year. And yet silver is very different from other industrial commodities. While virtually all of them most notably copper and crude oil remain below their price high points of 2008, silver has risen more than 50 percent higher. Despite the multiple uses of silver in industrial processes, in recent years the metal’s key price driver has been investment. And over the last decade, silver has traded more closely with gold than with copper, a purely industrial metal. In fact, “Dr. Copper” is regarded by many economists as a key barometer of global economic health.
Silver investment for profit has been substantially correlated more closely with gold than with copper, even during the very difficult economic crisis of 2008 and early 2009, when real estate and financial markets collapsed. As pointed out above, though its price declined, silver outperformed all stock markets and foam commodities during the crisis by a wide margin reflecting its closer investment affinity to gold. This is an extremely important point regarding silver’s economic sensitivity. Because the next time the economy begins to falter, if copper and gold go their separate ways (as usual), silver most likely will follow the rarer metal. Furthermore, if silver continues to move closely with gold, the less expensive metal will be more accessible to more investors. The United States emerged from the severe 2008 recession in 2009 and has been in recovery for a number of years. Although the economy’s last growth rate was recorded at a mere 1.3 percent, as of this writing no major economist has mentioned the risk of a return to recession. But this is a fact: It is a historic inevitability that sooner or later the economy will contract. And considering the ongoing European recession, as well as the recent dramatic slowdown in economic activity in Japan, China, and Brazil, the risk that the United States will go into a recession soon is not negligible. Let’s go ahead and visualize the upcoming recession, which hopefully is far off.
At the pace of present job growth, which has barely been able to match the growth in new entrants into the workforce, unemployment is unlikely to drop rapidly. There is hope that economic recovery will lead to improving job growth that can drive higher tax revenue with which to reduce our dependence on federal borrowing. But consider the magnitude of the challenge, disheartening as this is. Since the last recession, in merely four years the national debt has risen by more than 50 percent, a rise in leverage not experienced ever in the United States in peacetime. With deficits of over $1 trillion in each of the past four years, about a third of government spending each year is borrowed. Facing the so called U.S. fiscal cliff an expected combined $600-billion hit from impending tax increases and spending reductions to say that the federal government would struggle to spend even more to confront an economic slowdown is an understatement. It would not be difficult to argue that the country simply cannot afford to embark on expansionary fiscal policy when the next recession arrives.
But most recessions end or are mitigated by the Fed. When the economy slows and inflationary pressures wane, the Fed begins reducing interest rates, which encourages spending that leads to recovery. However, to combat the last recession, the Fed drove the interest rate it controls to zero for the first time in U.S. history. This has driven interest rates on virtually all forms of borrowing to the lowest rates ever experienced. When the next recession arrives assuming the economy has not normalized, which is a fair assumption considering the present environment the Fed will be forced to intensify the only policy it can employ: to print money and buy financial assets from investors that will hopefully spend the money on things that help the economy. Money printing, both in recent years and throughout financial history, invariably leads to higher gold prices. Silver is more highly correlated with gold than anything else, as financial markets have shown over the past 40 years. Though silver is a more volatile investment, higher gold prices most often lead to higher silver prices. Considering that the scale of monetary easing would have to be even deeper in recession than in the sluggishly growing economy we have seen in recent years, it follows that silver is likely to benefit from the next recession.