Silver has been a dreadful investment over the last six months. Having reached $26.50 per ounce (oz) in March 2022, the price is now just $18/oz. Indeed, in real (inflation-adjusted) terms, dollar-priced silver is lower now than it was just after World War I. Yet the long-term outlook for investing in silver remains auspicious.
The many uses of silver
Silver is a monetary metal, like gold, but also an industrial one whose range of applications keeps on expanding. Ideal for jewellery, it is very durable and also one of the world’s best electricity conductors. Nearly all computers and mobile phones contain silver, as it is perfect for coating electrical contacts on printed circuit boards. Silver is also used in making electricity-producing solar cells and plasma display panels.
On/off buttons for televisions, phones, microwave ovens, children’s toys and keyboards all use silver membrane switches. Silver ink removes the need for wires. To help fight infections, silver coatings are applied to medical devices, bandages and ointments. Furthermore, silver ions are effective against antibiotic-resistant bacteria, specifically MRSA, and are added to water-purification systems as a sanitiser.
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Just six months ago, the metal’s fundamentals seemed rock solid. Inflation was taking off in the US, UK and Europe. Inflation is good news for monetary metals, given their traditional role as a store of value and a safe haven from economic and political turmoil. Furthermore, real interest rates were declining, which normally presages price increases (precious metals carry no yield, so their relative appeal is greater when real interest rates fall).
Supply is constrained while demand is rising
And the global supply/demand balance was moving in silver’s favour. Russia, which at the time provided 5% of the world’s silver, according to financial-data provider S&P Global Market Intelligence, had just invaded Ukraine. Russian supplies of the metal appeared to be under threat. The Silver Institute’s April 2022 World Survey forecast global silver mine production growing by 2.5% year-on-year to 843.2 million ounces . For a third straight year, silver recycling was set to grow by 4%. Overall supply was estimated at 1,030 million ounces.
Meanwhile, 2022 industrial demand was expected to hit a new record high, with the big drivers being more electric vehicles, or EVs (which have higher silver loadings than those with internal combustion engines) and more investment in renewable energy. Jewellery fabrication was forecast to top 2019 levels, while purchases of physical silver for investment were likely to remain flat at around 25% of overall usage. Total demand was estimated at 1,102 million ounces, creating a 72 million ounce deficit.
Headwinds gathered in spring
In short, silver looked set to mount a sustained move to new high ground. But then the game changed. Spooked by America’s ever-increasing cost of living, the US Federal Reserve began raising America’s main interest rate. This boosted the US dollar, hampering silver as it is priced in dollars. It also pushed up real interest rates, creating another headwind for silver. In April 2022 the greenback broke strongly upwards out of the narrow range in which it had traded since 2014. This hit the dollar value of silver so hard that the metal’s value began to fall sharply in other currencies too.
Today, silver’s immediate pricing backdrop is still looking unclear. The dollar has continued to climb, reaching its highest level against the rest of the world’s currencies for 20 years. The Fed has persisted in raising interest rates and has been talking tough on future increases in borrowing costs, regardless of the resultant downside risks to the US economy and its unemployment rate.
For example, John Williams, head of the Federal Reserve Bank of New York, said that America’s central bank will probably need to get its policy rate “somewhat above” 3.5% and keep it there through to the end of 2023. “Based on what I’m seeing in the inflation data and… in the economy, it’s going to take some time before I would expect to see adjustments of rates downward,” he told The Wall Street Journal.
At face value, this is negative news for silver. What’s more, a nasty recession would curb industrial demand for the metal, while the effect of Russian sanctions is still unclear. No wonder, then, that following silver’s recent price decline, many momentum traders expect the downtrend to continue.
Remember, though, former Fed chair Ben Bernanke’s observation that “monetary policy is 90% talk”. The Fed may appear to be playing hardball on rates, yet as Johns Hopkins University applied economics professor Steve Hanke comments, the US could be heading for a “whopper” of a recession next year. If America’s jobless rate starts climbing, the Fed could soon be singing a very different tune, and start trimming rates. In other words, look out for US rate cuts in 2023 even though inflation might well persist for longer than expected. As real interest rates fall back, silver could rebound like a coiled spring. Demand expectations would also be likely to rise.
The sky’s the limit for the silver price
How high might the silver price go? Silver has historically mimicked and amplified gold’s movements. The gold/silver price ratio is currently around 94, near the top of its range since 1945. It has only been higher on two occasions: early 1991 and at the start of the pandemic in Spring 2020. A return to 70 (assuming gold stays unchanged) would lift silver by a third.
Granted, global silver mine production will see continued growth over the medium term, says the Silver Institute. Yet Russian production may begin to fall if sanctions remain in place. And on a five-year horizon, world output will begin to decline unless sufficient capital investments are made. In addition, recycling looks set to decline for the next year or two.
Silver demand, meanwhile, is forecast to grow steadily in the next few years to successive record highs, says the institute, with industrial needs to the fore. Major drivers will be increasing use of EVs and green-economy applications. Jewellery demand is expected to expand even faster and physical investment is forecast to hold its own.
In short, this is a long-term positive outlook for prices. If physical investment does better than the Silver Institute’s expectations as silver’s monetary attractions increase amid falling interest rates and stubbornly high inflation, silver prices will be boosted further.
What’s the upside? Keith Neumeyer, CEO of Canadian silver miner First Majestic Silver, has often said that silver could reach $130 per ounce. He believes the current stockmarket cycle is similar to the 2000 dotcom bubble. As equities decline, he thinks silver mining will enjoy a big rebound. Lobo Tiggre, founder and editor of Independent Speculator, reckons Russian sanctions will create a “new Iron Curtain”, and the global economic fallout will endure, says Investing News Network (INN). Tiggre also says silver could reach triple-digit levels.
“Given our expectations for inflation to increase over the coming months... we continue to believe that gold and silver prices will continue to climb over the coming quarters,” analysts from Canadian financial services group CIBC told INN in May 2022; at the same time, Peter Krauth of Silver Stock Investor said that “we are very likely... to experience the greatest silver bull market of our generation”.
How to invest in silver now
What to buy? Investors must decide the level of risk they can stomach. You can buy direct exposure via an exchange-traded fund (ETF) tracking the price of the metal. Alternatively, silver miners tend to be leveraged plays, rising and falling faster than the price of the metal itself. The most upside scope comes from buying high-risk, very volatile, “junior” explorers. If things go awry, however, investors can see their stakes obliterated.
Lower down the risk scale, there are developers who are already planning how to extract their minerals. Yet even if feasibility studies (including budgets, permit approvals and capital-raising plans for mine construction) have been undertaken, there is still no guarantee of production.
If you prefer a relatively safe investment, stick to established silver producers that generate real cash flow. They have the least upward potential but also the lowest downside risk. Major miners can often produce several other metals, which provides further diversification. Further, if their mining operations keep prospering, you could benefit from rising dividend payments.
Lastly, remember political risk. Many silver mines are in countries that can be ambivalent about foreign-owned operations. Invest where there is unequivocal support for the mining industry. We look at three investment options below.
What to buy
The WisdomTree Physical Silver (LSE: PHSP) is an exchange-traded commodity (ETC) fund that offers a simple, cost-efficient and secure way to play physical silver by providing a return equivalent to movements in the metal’s spot price, minus fees. WisdomTree Physical Silver is backed by segregated, individually identified and allocated silver bars that are held by HSBC Bank.
Wheaton Precious Metals (Toronto: WPM and NYSE: WPM), is one of the world’s largest precious metals streaming companies. It buys all, or part of, the PM or cobalt output from high-quality mines for an upfront payment and an extra sum on metal delivery. Wheaton has a portfolio of low-cost, long-life assets: it has streaming agreements with 23 operating mines and 13 development-stage projects.
In 2022’s second quarter, WPM generated 43% of its revenues from silver. Apart from that first cash payment, Wheaton typically doesn’t incur capital expenditure or exploration expenses at its suppliers, so it benefits from rising silver prices and achieves high profit margins without taking the risks to which physical miners are exposed. Such attributes are factored into WPM’s share price.
The market cap is $14.5bn and the stock stands on a prospective price/earnings (p/e) ratio of 25. But WPM’s valuation isn’t earnings-driven – it’s powered by precious metal prices, especially silver and gold. Their scope for price rises makes this a potentially very profitable stock.
Hecla Mining (NYSE: HL), the oldest NYSE-listed American precious metals miner, is the largest primary US silver producer with a 40% market in world-class North American silver and gold mining districts. Having just completed the acquisition of Canada’s Alexco, it ticks all the political-stability boxes.
“Hecla is… the world’s-fastest growing established silver miner,” says president and CEO Phillips S. Baker, Jr. “With additional production from Alexco’s Keno Hill, we expect Hecla to produce 17 million ounces-20 million ounces per year in the next few years, 30 to 55% more than 2021.”
Net debt is $336m versus equity of $1.8bn and a €2.2bn market value. The shares are on a similar p/e to Wheaton, but again the company’s shares are mainly driven by silver prices. A long-term buy.
David J. Stevenson has a long history of investment analysis, becoming a UK fund manager for Oppenheimer UK back in 1983.
Switching his focus across the English Channel in 1986, he managed European funds over many years for Hill Samuel, Cigna UK and Lloyds Bank subsidiary IAI International.
Sandwiched within those roles was a three-year spell as Head of Research at stockbroker BNP Securities.
David became Associate Editor of MoneyWeek in 2008. In 2012, he took over the reins at The Fleet Street Letter, the UK’s longest-running investment bulletin. And in 2015 he became Investment Director of the Strategic Intelligence UK newsletter.
Eschewing retirement prospects, he once again contributes regularly to MoneyWeek.
Having lived through several stock market booms and busts, David is always alert for financial markets’ capacity to spring ‘surprises’.
Investment style-wise, he prefers value stocks to growth companies and is a confirmed contrarian thinker.
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