Silver embarks on a wild ride

Silver is often written off as a cheap version of gold, says Andrew Critchlow in The Daily Telegraph. But while it is often overshadowed by the more famous precious metal, and usually follows it up or down, there’s a lot more to it than that. Like gold, it is a monetary metal, and is therefore seen as a traditional store of value and a safe haven in rough times. But it is also an important component in a wide range of industries, which jointly account for over 50% of overall demand; in gold’s case, the figure is a mere 10%-15%.

Silver is an unusually flexible and useful substance, making it “indispensable” in sectors ranging from electronics to medicine (it has anti-bacterial properties). The advent of digital photography reduced the use of silver in photographic paper, but this development is being more than offset by new uses, more and more of which are being “invented, discovered, and, importantly, commercialised”, says The Silver Institute, which forecasts a 27% increase in industrial demand from 2013 to 2018.

Take the rapidly growing solar energy sector: silver is a key component of the photovoltaic (PV) cells used to generate power from the sun. IHS, a consultancy, thinks global PV market demand will rise by 30% to 57 gigawatts this year, with China alone set to install 17 gigawatts of capacity. The industry could get an additional boost from an international climate change agreement this year.

In the meantime, supply looks set to deteriorate. HSBC expects less scrap to reach the market this year and is also pencilling in a slight fall in mined supply following almost a decade of increases. And a lack of investment “could see production plateau over the next few years”, notes Critchlow.

However, on the monetary front, silver could struggle as US interest rates rise, making precious metals, which pay no interest, look less appealing. Higher rates would also allay fears of inflation taking off. The market is also very small, which makes it extremely volatile, and it is impossible to predict whether the industrial or the monetary outlook will affect prices most.

Given all this, we would recommend sticking to gold to insure your portfolio. But those intrigued by silver’s industrial future and willing to stomach wild price gyrations can gain exposure with through an ETF tracking the spot price, the ETFS Physical Silver (LSE: PHAG).