Feeling brave? Have a punt on silver

Silver prices hit a 31-year high five years ago, since when they have fallen back steadily. But in the past month the grey metal, or “poor man’s gold”, has gained a new lease of life. Prices have bounced by just over a fifth to a one-year high around $18 an ounce.

One reason is that gold has recovered strongly this year, and because silver is a monetary metal, it often tracks the gold price. Gold has bounced thanks to a weaker dollar and signs that the US Federal Reserve may not raise interest rates by as much as initially expected this year, making gold’s lack of income less of a problem for investors. Increasingly negative interest rates elsewhere have fuelled demand for a store of value, as have fears of a rebound in inflation.

Another part of the story, however, is improved prospects for industrial demand, which comprises around half of overall silver consumption (in gold’s case, the figure is 10%-15%). As China has recovered, silver, used in industries ranging from electronics to medicine, has begun to look more appealing.

Dwindling supply is also a factor in this bounce, says David Fickling on Bloomberg.com. Silver occurs naturally in ores with copper, lead and gold, so it appears mostly as a by-product of other metals. At present, miners are cutting back on output following substantial price falls. That means less silver is being produced too. The Silver Institute thinks supply is set to fall by 5% this year, and could fall until 2019.

Given all this, it’s no wonder investors have rushed into the silver market, driving prices up quickly. The backdrop remains encouraging, although given silver’s tendency to magnify gold’s moves up and down, only investors with strong stomachs should consider a small punt on silver through the ETFS Physical Silver exchange-traded fund (LSE: PHAG). We continue to advocate holding 5%-10% of your portfolio in gold.