Silver’s Purchasing Power

Purchasing power is the number of goods and services that can be bought by a certain good or asset. Usually, we measure the purchasing power of fiat currencies, as people are generally paid in and use them in their daily life. For example, the purchasing power of the greenback measures how many goods or services one U.S. dollar can purchase.

The problem with fiat currencies is that they are prone to loss of purchasing power. The currency loses its purchasing power when prices increase (i.e. there is inflation), as consumers are able to buy fewer goods and services for the same amount of money. Conversely, money gains purchasing power when prices decrease (i.e. there is deflation) and consumers can purchase more stuff receiving the same nominal income. A concept related to purchasing power is purchasing power parity, which allows us to compare incomes among economies which use different currencies.

Contrary to fiat currencies which can be printed by the central banks (such as the Fed, the ECB or the BoJ) at will, the supply of silver is naturally limited. This is why historically people have chosen gold and silver as money – thanks to their remarkable features, these precious metals have been considered excellent stores of value and hedges against inflation. There is even the adage which reflects the relatively stable buying power of gold: “With an ounce of gold a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, in the Depression of the 1930s.”

The same applies to silver, which has high positive correlation with gold. Investors believe that the white metal also helps to preserve, or even enhance, their purchasing power over the long term.

Is that true? Well, it depends on the perspective. As one can see in the chart below, the real price of silver, i.e. adjusted for inflation, at least when measured by the CPI, has fluctuated substantially over time. However, real silver prices are currently slightly higher than 50 years ago, which means that silver has not lost its purchasing power.

Chart 1: Silver price adjusted for inflation (calculated as the ratio of the London Fix relative to the CPI index, and multiplied by 100 for convenience) from 1968 to 2017.

To sum up, the purchasing power of silver is remarkably stable, but only over the very long run. The price of goods and services, as gas, expressed in silver several decades ago is about the same as today. It means that in terms of purchasing power, the value of silver remains relatively stable, while the value of the greenback shrinks. Yet over investment time horizons, the purchasing power of precious metals may vary (and sometimes it may even fall, as in the 1980s and the 1990s). It is especially true for silver, which is significantly more volatile than gold. Keep this in mind, when investing in silver.