- Silver is both a precious metal and a commodity, which makes it a very interesting investment.
- Silver prices jumped 26% year to date and the market has been in a deficit for 3 years.
- In the long term, silver will continue to be very volatile but might present excellent investment opportunities for brave investors.
Silver is a special metal as it is considered both a precious metal and an industrial commodity. Silver is used for solar panels, water filtration, jewelry, electrical contacts and conductors, LCD screens, x-rays, disinfectants and for other various applications. This makes silver have, unlike gold, a pragmatic use influencing the demand for the metal.
This article is going to provide an analysis of the current silver market, elaborate on the investment thesis for silver by assessing risks and rewards, and provide investment opportunities.
Silver has been battered alongside other commodities but what strikes is its volatility.
Figure 1: Silver price per ounce. Source: SILVERPRICE.
Silver has much more accentuated spikes and busts than gold but they are positively correlated, so an investment in silver would resemble one in gold and add the benefit of a commodity.
Figure 2: Gold price per ounce. Source: SILVERPRICE.
Supply and Demand
In 2015, silver demand hit a record high while mine production growth declined to its slowest pace in four years. This resulted in an annual physical deficit for silver of 129 million ounces, making it the third consecutive annual deficit. Even with the deficits, silver prices continued to fall up to December 2015 when silver reached a low of $13.7 per ounce because of expected higher interest rates in the US and slowing industrial demand in China.
As the situation in the US is not that good and demand from China did not fall as expected, silver has rebounded alongside other commodities to the current price of $17.25.
Figure 3: Silver price in the last 5 years. Source: Bloomberg.
It is interesting that as silver prices fall, demand for silver coins increases as coins are priced per ounce.
Figure 4: Silver eagle coin as an investment. Source: APMEX.
Except for investment, silver demand has increased for jewelry and silverware bringing to a total increase in demand of 25% in the last 10 years.
Figure 5: World silver supply and demand. Source: World Silver Survey 2016.
Meanwhile the supply has increased only by 13.4% in the last 10 years. The fact that silver supply remained stable in the last decade, even with silver prices going above $40 per ounce, shows how small imbalances can make silver a very profitable investment, especially at these low prices.
Silver has two purposes, it is a precious metal and therefore considered a store of value and protection from inflation. As inflation is something most of the millennials only heard about in school and the last years have been good for the markets, silver got the short end. But any turmoil in global markets or hint of inflation could spur the metal. The volatility of silver is further excited by paper silver trading as currently, according to the U.S. Commodity Futures Trading Commission, there are 64,790 short contracts and only 22,928 long contracts so more volatility can be expected if shorts have to cover or try to force the market down.
Increased demand from China and a weaker dollar influenced this year’s rebound and the question now is if this can be sustained. In the long term, the World Bank does not expect average silver prices to go much higher as industrial demand stabilizes and investment demand declines, but the forecast is opposite from what is really going on as more investment coins are bought with silver prices declining.
Figure 6: World Bank long term outlook. Source: World Bank.
Long term downside risks to the forecast include stronger-than-expected monetary tightening and dollar strength. Upside risks include weaker global growth, financial stress in key economies, heightened geopolitical events, and stronger demand from consumers, central banks, and investors. As the Word Bank’s outlook is known to be the average, investors can expect both downside and upside risks that will make silver volatile in the long term.
One opportunity to invest in silver is through the iShares silver trust which follows the price movement of physical silver.
For more entrepreneurial investors, investing directly in silver stocks is a possibility but a limited one as silver is usually a byproduct from mining gold, zinc or copper. However, there are some potential investment that can be researched like Silver Wheaton Corp. (NYSE: SLW), Fresnillo Plc (FNLPF), Taho Resources (NYSE: TAHO), Coeur Mining (NYSE: CDE), First Majestic Silver Corp (NYSE: AG) and Pan American Silver Corporation (NASDAQ: PAAS).
Investing directly into mining stocks brings along other risks than just the above mentioned general risks related to silver, but can provide extra returns.
Silver gives two opportunities, one from being a precious metal and one from industrial demand. At current low prices, if you think the FED is not going to raise interest rates as the economy is not doing as well as it should, silver might be a very good investment.
It is impossible to know what will happen but we can be sure that silver will be volatile as short sellers will push prices down in a negative scenario and cover in a positive one. This makes silver a good diversification investment as it is uncorrelated to the general market or an investment for those who have the stomach to withstand large swings in prices.