Posted On June 14, 2017 By In Featured Writers With 735 Views

Is Silver Undervalued?

Today, Warren Buffett is acclaimed to be one of the greatest investors in the world. He has inspired millions around the globe to adopt value investing as the core principle of investing. Many are profiting and have built long-lasting wealth investing in the stock market through this principle.  

I’m included.

Personally, beyond stocks, I believe value investing is a principle that is applicable to investing in all asset classes. This includes private businesses, properties and commodities. This is because, in general, value investing focuses on three things:

  1. Finding Quality Assets that have Sustainable Value.
  2. Buying them when these Quality Assets are Undervalued (Cheap).
  3. Selling them when these Quality Assets become Overpriced (Expensive).

For devout followers of Warren Buffett, they would estimate the ‘Intrinsic Value’ of a stock before making an investment decision. Perhaps, if you are reading this, you may wonder, ‘Is it possible to estimate the intrinsic value of a commodity like silver?’.

My answer is ‘Yes’.

In this article, I’ll share 4 things you need to know in order to better appreciate the value of silver and to fairly estimate the intrinsic value of this precious metal.

#1: Ringgit is a Currency. It’s not Money.

Wait a minute!

Isn’t currency the same as money?

Regrettably, most of us do not realize that there is a huge difference between money and a currency. This is because we have conveniently associated cash (Ringgit) as money instead of a currency in our daily conversation. The absence of this revelation has hindered many from truly appreciating the value of both gold and silver today.

So, what’s the difference between money and a currency?

  1. Money, by itself, has intrinsic value. It is designed to hold onto value over a long-term. Since ancient times, there are only two forms of money which remain valuable until today. They are none other than gold and silver.
  2. Currency, by itself, has no intrinsic value. Its value is intangible as it depends on the creditworthiness of its issuer. Generally, the value of a currency would erode over time. This includes our Ringgit and that’s why we have inflation.

#2: Silver is Money. But, we are ignorant of it.

In the 21st century, we no longer use silver as a medium of exchange on a daily basis. Thus, it is hard to grasp the idea that silver is money. But, do you realize that most words that we refer to as ‘money’ is linked to ‘silver’? For instance,

  1. Ringgit

    I’m not joking.

    Originally, Ringgit was referred to the serrated edges of silver Spanish dollars which circulated widely in Peninsula Malaysia during the Portuguese colonial era in the sixteenth and the seventeenth century.  

  2. Bank

    The direct translation of the word ‘Bank’ in Chinese is ‘银行’ which is pronounced as ‘Yin Hang’. The word ‘银’ or ‘Yin’ literally means silver in Chinese.  

  3. Dollar

    The word ‘Dollar’ originates from a German word ‘thaler’. It is a short abbreviation of Joachimsthaler and was referred to a coin minted from the silver mines of Joachimsthal in Bohemia which is now in Czech Republic.

    The term was later applied to a coin used in Spanish-American colonies and was adopted as the name of the US currency unit in the late 18th century.

    The Dollar sign ‘$’ was originally referred to the Spanish American Peso which is also the ‘Spanish Dollar’. Doesn’t it sound familiar?

    The Spanish Dollar is a silver coin that was minted by the Spanish empire to correspond to the Thaler in Germany. It was used as a medium of exchange around the world due to its uniformity in standard and milling characteristics.

#3: The US Dollar has already Failed as a ‘Claimcheck’.

Initially, the U.S. One Dollar Note (US$ 1) was known as a Silver Certificate. This means, in the past, you may exchange the US$ 1 note to redeem a piece of silver coin.

Meanwhile, the U.S. Twenty Dollar Note (US$ 20) was known as a Gold Certificate. Likewise, you may exchange the US$ 20 note to redeem a piece of gold coin.

The initial exchange rate set between gold and silver was 20 to 1. This means, one gold coin has the equivalent value to twenty silver coins.

Since then,

  1. In 1933, U.S. President Franklin D. Roosevelt has signed the Executive Order 6102 and ended the circulation of gold certificate. This means, the US$ 20 note is no longer exchangeable to a gold coin as the legal price of gold was revised to US$ 35.
  2. In 1964, C. Douglas Dillon, U.S. Secretary of the Treasury, has ceased the redemption of Silver Certificates for silver coins. This means, the US$ 1 note is no longer exchangeable to a silver coin.
  3. In 1971, U.S. President Richard Nixon has taken the U.S. Dollar off the gold standard. Gold price is no longer pegged to US$ 35 an ounce.

Once started as a ‘Claimcheck’ or ‘Representation’ of gold and silver, the U.S. Dollar becomes a fiat currency as it is no longer redeemable or backed by gold and silver.

#4: Finally, the Intrinsic Value of Silver

As mentioned in Point #3, the intrinsic value of one gold coin is equivalent to twenty silver coins.

Today, as I write, gold is trading at US$ 1,294.94 an ounce. Thus, the intrinsic value of silver is US$ 64.75 an ounce.

Intrinsic value of Silver

= Gold / 20

= US$ 1,294.94 an ounce / 20

= US$ 64.75 an ounce

It is substantially higher than the current trading price of silver of US$ 17.70 an ounce. In other words, silver’s trading price is presently 73% lower than its intrinsic value of US$ 64.75 an ounce.

This is insane.

It’s no wonder why some investors around the world view silver as potentially one of the most undervalued investments in the 21st century. After all, how often can you find something which is priced 73% below its intrinsic value?

Conclusion: Should I get into Silver now?

Personally, I believe anyone should do the following before investing in anything:

  1. Get educated first. Read some books on gold and silver (I have a few good ones) and attend some seminars on it.
  2. Ask yourself. Does investing in silver fit into your personal investment plan?
  3. Shop around for the best silver bullion products. There is a wide range of products to explore. Since you’re reading this, you may start with nubex.my.  

 

Regards

Ian Tai

Co-founder of Goldsilvermethod.com

 

 

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About

Ian Tai

Ian Tai is an ACCA Graduate and has been investing in Gold & Silver since 2010. Inspired by a quote made by Donald J. Trump, ‘What’s the point of having great knowledge and keeping it to yourself?’, Ian’s mission is to share his knowledge and research to anyone who is interested in achieving financial security and preserving wealth specifically on investing in precious metals. Ian has also written several books on his passion of precious metal investments. The first one, Silver published in 2011 speedily climbed its way to be the 7th bestselling book in Finance category in October 2012. He has recently written a book, entitled, Gold marking his appearance as a local English author but also marks his debut Chinese-speaking booktalk at BookFest.

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