Got Your Eye On Silver? Read This First

March 22, 2018

Got Your Eye On Silver? Read This First

I like to have some gold miners in my portfolio as a hedge against future possible crazy monetary policies. Let’s say that it helps me to sleep well at night.

I’ll do an update on gold soon but before I do, I want to share my thoughts on silver. Many see gold and silver as equals which leads them to believe that silver is extremely undervalued and overlooked.

Let’s dig into the supply and demand trends for silver and the main trends surrounding silver in general in order to see whether silver is like gold or if it is perhaps better or worse.

Silver Price, Demand & Supply

Silver prices, hovering around $16 per ounce, spiked in 2011 and are now 4 times above the levels of the 1990s. So there’s room to rise, but also room to fall.

Figure 1: Silver price since the 1990s. Source: Apmex.

What’s interesting is that silver has declined much more than gold over the last 8 years. Gold is down about 30% from its peak while silver is down almost 70%. This could mean two things, silver has reached a bottom and won’t go below where it is now or there are some differences between silver and gold.

From a broader perspective, silver is down from an average of $30 to the current $16 which makes the decline smaller.

Figure 2: Silver prices remain depressed. Source: Apmex.

In order to see what can happen, we have to take a look at the supply and demand case for silver.

The latest data from the Silver Institute shows how there is an ongoing silver deficit that was smaller in 2016.

Figure 3: Silver supply and demand. Source: Silver Institute.

These deficits shouldn’t mean much as they depend on what perspective you look from. If you look from an industrial perspective, demand is 56% of the supply with 20% coming from jewelry, 20% from coins and bars, and 5% from silverware. What’s important to note is that demand for coins and bars dropped the most in 2009 during the crisis but, consequently, increased and reached a high point in 2015 when silver prices were the lowest. Perhaps demand for silver will also be tied to liquidity which doesn’t make silver a great hedge against illiquidity or a capital storage vehicle.

It’s interesting that demand for silver coins and bars comes mostly from North America and India.

Figure 4: Global demand for coins and bars. Source: Sliver Institute.

Other interesting players in the silver market are exchange traded products and their inventory build. Thanks to them, many can own silver without the fuss of physically owning it so that too impacts demand, though that demand is volatile.

Figure 5: ETPs are too significant a player, but less in the last 6 years. Source: Sliver Institute.

The supply has been relatively stable over the past 8 years despite the high volatility in prices. This means that mine supply is inelastic but also that the costs are below the lower lever reached by the price of silver.

Figure 6: Silver cost curve. Source: CRU.

A cost curve like this means that a lot of producers are profitable. Further, silver is often a byproduct of other mining activities which means those producers will produce no matter what and will always create supply on the market.

However, this also means that there is a bottom to silver which mitigates the risks as there is always the industrial demand which won’t go away that quickly as the metal will probably be used more and more as we shift to more solar energy usage. The facts that the deficits in the silver market have been there for a while and supply isn’t elastic further fuels the case.

Figure 7: Long term silver supply and deficit. Source: Sliver Institute.

From what I see, I would argue that the downside to silver prices is limited and in the worst case scenario we could see prices in the low teens. However, on the upside, we have to see where the demand will come from, what the catalysts will be, and if silver is like gold from a hedging perspective?

Comparing Silver To Gold

The total number of gold ounces produced per year is around 90 million ounces making it a $117 billion market. The 1 billion silver ounces produced make silver just a $17 billion market which is then driven by different forces.

Central banks, hedge funds, and big players are in the gold market while with silver the market, makers are the industry, jewelry and coin collectors. So my take is that the same rules hold for investing in gold and silver miners, where costs, life of mine, and operating risks matter first.

I wouldn’t invest in silver just because it looks undervalued in respect to gold from an historical perspective as the ratio is at historical highs.

Figure 8: Gold to silver ratio. Source: First Majestic Silver.

However, with industrial demand there, the risk of investing in silver is much smaller than investing in gold because the demand won’t suddenly disappear. The coin collectors and bar collectors might rush to it in the case of monetary turmoil which might make it spike even more than gold in the future.

So my conclusion is that silver is very interesting, should be combined as a hedge with gold usage. What’s also to like is that there is some actual usage to it, especially in the growing solar energy environment. I’ll be discussing more about silver and also make a video on the top 10 silver miners to see what the environment is like there.

By Sven Carlin Commodities Gold Investiv Daily Silver Share: