The recent major selloffs in Silver have given investors an excellent chance to accumulate a long-term position in physical holdings and silver companies. As the price has come down, I have been recommending for some time to dollar cost average and/or pyramid down into silver and silver equities. So what is the path to a surge in silver prices? My primary thesis is that the endless easy money policies from central banks around the globe have created a long-term tailwind for the various precious metals.
Despite the short-term pressure on the metals, the Federal Reserve’s continued accommodative and dovish policies should create a weaker dollar in the long run, inflation, and, in turn, bolster the prices of gold and silver. This thesis rests on silver being treated as a precious metal. Precious metals hold value and increase their buying power when inflation ticks up. While this has yet to occur in the U.S., it will be a likely result of a diluted money supply. While gold is the ultimate hedge against inflation, other precious metals — such as silver, Platinum, and Palladium — all tend to move higher when inflation creeps up.
Gold has long been considered the best of the precious metals, but as its price has been driven up, retail investors have turned to silver as an alternative precious metal. Unlike Gold, the great thing about silver is that there is huge industrial demand, as well. The second key driver that I believe could cause a surge in silver in the next few years off the recent lows is the multiple sources of demand for the metal, in particular technology.
Precious metal demand
There was a significant shortage of both American Silver Eagles from the U.S. Mint as well as junk silver available (that is, pre-1965 U.S. dimes, quarters, and half dollars) in 2013 as a result of record high demand. Further, silver ETFs have continued buying silver bullion at a record pace. Thus, demand for the metal is there from physical investors and has helped keep silver above the $18 mark.
In fact, the $18 mark has served as the floor for silver, only dipping slightly below this mark. This mark serves as an important technical resistance point. It has bounced off this level several times in the past year. Aside from silver being a precious metal, it also has many industrial and technological applications. Therefore, there will always be some level of demand, but such demand should pick up significantly when the global economy comes fully out of recession.
Despite stock markets in the U.S. setting all-time highs, the broader economy is still just limping along. The most recent GDP numbers are showing expansion. Further, the jobs picture has yet to improve markedly, though unemployment has come down, albeit slowly. This slow growth has led to industrial demand for silver, but the growth is slow enough to keep the Fed on the easing accelerator, which bolsters the precious metal side of the metal.
When the economy rebounds, there will be a spike in demand in many areas. The demand will not be just in coin and bullion form but also in jewelry, silverware, and dentistry. On the technology front, silver is one of the most conductive metals out there, and thus is utilized in photography, electronic devices, optics, medical devices/tools, and most recently in nanotechnology.
One of the factors driving the forecasted improvements is demand for ethylene oxide, an intermediate chemical in industrial processes that requires silver. The production of that and other intermediaries will help the U.S. run countertrend to other industrialized nations, which, according to Thomson Reuter GFMS, will see slow growth. In absolute terms, GFMS expects China to achieve successive record highs in terms of its industrial use of silver over the forecast period, along with the United States.
Robust growth in demand from the auto sector is also expected, and it will help further underpin the performance of the electrical and electronics segment. Auto production is expected to rise, boosting silver usage due to the growing number of units. However, auto-related silver demand has already outpaced production because of the growing number of electronic accessories in each unit. GFMS expects this trend to continue as features once reserved for luxury vehicles become more standardized. Improvements in the economic backdrop are also expected to boost silver demand from the housing and construction industries.
One lesser-known growth area for silver use is in technology, and that is where a lot of demand will be generated as we further delve into an era dominated by Apple (NASDAQ:AAPL) iPhones, iPads, etc., as well as the company’s competitors’ similar products. Apple, with its millions of iPhones sold, has created massive industrial demand for silver. As its sales are strong this demand will continue. In fact, there is an average 20 cents of silver now used in each cellphone.
While that is not much for a single phone, considering there were nearly 6 billion mobile subscribers worldwide in 2011-2012, a number that’s growing in 2014, it becomes clear that new phones will always be in demand. Using the average of 20 cents per phone, we generate demand for more than $1 billion worth of silver in just new mobile devices alone.
There is a lot of silver in old cell phones, photography chemicals, and medical devices that already have been taken out of the market. Although there is a push to recycle electronics and reclaim costly elements like silver within them, in situations where silver is used in very small portions (such as new smartphones), it is not cost effective or even practical to recover the silver. Thus, new silver will be utilized in these devices.
At the time of this writing, silver is priced around $19.53 per ounce, approximately 70 percent off its recent highs set in April 2011. Gold is currently priced at about $1,301 per ounce. That represents a 66-to-1 gold-to-silver price ratio, whereas the historical ratio is 16-to-1. The respective prices of gold and silver have not approached this historical ratio in many years, and I believe a reversion is long overdue.
To achieve this reversion, gold would have to fall almost $1,000 per ounce or silver will have to rise at a greater rate than gold in value in the coming years. I believe the latter is far more likely than the former, especially in a climate of endless monetary easing. Combine this with the rising demand in the technology sector and the fact that industrial demand will return in full force once we have moved completely out of the recession, and we have a strong case for an investment in silver. The ratio has crept up this year to date, but it has generally been in the 50-54 range for some time. Even a reversion to this range suggests upside for silver.
There are three ways investors can gain exposure to silver. My top approach for silver exposure is purchasing physical silver bullion and coins, followed by purchasing shares of ETFs that track silver prices, and finally through the stock of the individual silver companies/miners.
In my opinion, the best way to invest in silver is through physical bullion or coins. There are dealers in most cities and merchants on the Internet where you can buy silver bullion bars and/or coins. I not only consider physical silver a wise investment given government stimulus, but I also consider it to be a form of insurance in the case of a total breakdown of the fiat currencies and modern financial systems we have in the world today.
If you decide to invest in physical silver assets, do so by only buying from a reputable dealer. The only downside from Internet purchases are high shipping and insurance costs, as well as the possibility of a required minimum purchase. Whenever possible, buy locally to avoid excessive shipping and handling fees.
Although I recommend owning physical assets, one option every silver bull should consider, especially those who do not feel comfortable with purchasing physical silver, is buying units of an ETF.
The iShares Silver Trust (ARCA:SLV) is a popular investment that seeks “to reflect the price of silver owned by the Trust, less the Trust’s expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver.” Although the fund is not the exact equivalent of an investment in silver, it provides investors with an alternative that allows a level of participation in the silver market through the securities market.
The fund has $6.3 billion in assets with an annual expense ratio of approximately 0.5 percent. One important thing to note is that iShares recently announced an increase in fees. This increase makes this trust slightly less attractive than it once was. Although this trust tracks the price of silver, if silver were to remain stagnant for all of 2014, say at $20 per ounce, then the trust would lose value given the fees and expenses. Overall, it does a good job of tracking silver price moves in general, but this caveat is important to consider for a long-term investment. Shares currently trade at $18.60 on average volume of 6.6 million shares and have a 52-week range of $17.75-$23.84.
Finally there are the silver companies/miners to consider for exposure to silver. There are plenty of individual companies that I really like. The best way to gain exposure to silver miners as a whole is through the Global X Silver Miners ETF (NYSE:SIL). The Global X Silver Miners ETF currently trades at $12.13 on average daily volume of 255,000 shares. It has a 52-week range of $10.46 to $16.88.
For those willing to take on more risk and do the necessary homework, an individual silver company or miner on my recommended list could be considered in place of SIL, which potentially could offer better returns. However, the Global X Silver Miners ETF will offer exposure to the whole sector.
I maintain that long-term precious metals stand to gain significantly from balance sheet expansion at central banks and currency debasement. I believe silver and silver companies may outperform gold in the next few years. With the Federal Reserve once again reiterating that it will maintain its accommodative stance, the long-term tailwinds are in place for the precious metals despite recent price action and technical selling.
However, silver is not only a precious metal currency but also has massive industrial and technological demand, particularly in the technology sector. Smartphones alone generate billions of dollars in silver demand, much of it coming from technology giants. This article presents some bullish evidence to argue in favor of silver, and I believe each approach outlined can be profitable on the rebound. At current levels, I believe silver and silver companies are significant opportunity buys, especially for the long-term investor.Courtesy: Christopher F. Davis via Wallstcheatsheet
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