Aug 04, 2023
By Rohan Reddy on Jun 29, 2023 Silver often flies under the radar of its metal counterpart, gold, but silver has unique properties that make it attractive as both a precious and an industrial metal.
By Rohan Reddy on Jun 29, 2023
Silver often flies under the radar of its metal counterpart, gold, but silver has unique properties that make it attractive as both a precious and an industrial metal. The following analysis seeks to shed additional light on silver by answering five key questions:
Silver ore is mined through both open-pit and underground methods. The open pit method involves using heavy machinery to mine deposits relatively near the Earth’s surface. In underground mining, tunnelling deep shafts into the ground allows for the extraction of the ore. With extraction completed, the ores are crushed, grounded, and then separated through a process called “flotation” to achieve mineral concentrations 30-40 times higher than natural occurrences. Refiners then further concentrate this extraction through the process of electrolysis or amalgamation.1
Only 28% of silver derives from mining activities where silver comprises the primary source of revenue. The remaining 72% comes from projects where silver is a by-product of mining other metals, such as copper, lead, and zinc.2 As expected, the revenues of firms focused on primary silver production tend to be much more impacted by silver prices than firms that produce it as a by-product.
Silver can be found across many geographies, but approximately 50% of the world’s silver production is found in the Americas, with Mexico, Peru, and Chile supplying 42%. Outside of the Americas, China, Australia, and Russia combine to make up nearly 24% of the world’s production.3
For centuries, silver has been used in a variety of luxury goods, such as jewelry, tableware, and fine art. Many buyers look favorably upon the durable nature of silver and its collectability aspect. Today, around 25% of silver’s consumption stems from this pocket of the market, including jewelry and silverware.4 Silver is a significant material for industrial uses as well: its industrial usage has substantially increased in the last years due to silver’s great characteristics of thermo-electro conductivity, ductility, malleability, and high sensitivity to light. The metal is used extensively in a variety of faster-growing electronics segments, such as solar panels, LED lighting, flexible displays, touch screens, RFID tags, cellular technology, and water purification. Silver’s unique properties, as well as the relatively small quantities of the metal required in many applications, often make it an irreplaceable input.5
Silver and gold are often compared to each other, given their common classification as precious metals. Note two important differences between them: Silver’s additional industrial usage and their relative market sizes.
As discussed in the section above, industrial usage of silver has substantially increased, accounting today for about 46% of its annual demand.6 Gold, by comparison, has only about 6% of its demand driven by industrial use, with the rest attributed to jewelry, gold bars and central banks buying.7 This difference means that gold is more purely a precious metal, whereas silver and its price is impacted by both demand for precious metals, as well as industrial demand. Moreover, the market for silver is smaller than gold’s one8 and tends to be more volatile.9
The gold-to-silver ratio is a commonly cited figure that represents the amount of silver required to purchase one ounce of gold. This ratio tracks the prices of these metals relative to each other and can indicate when one is potentially cheaper or more expensive than usual. Over the last 30 years, this ratio has been at an average of around 67. The Gold/Silver ratio is considered most useful at its extremes. When relative valuations hit extremes, the ratio tends to revert to historical levels, triggering a mean reverting mechanism. Currently the ratio is near 82, which possibly indicates that silver is undervalued relative to gold.10,11
Notwithstanding the mentioned relevant differences, silver is often considered as a “second gold” given its relationship with yield and the US dollar and its demand as a store of value. Historically, when US real yields are lower and the US dollar weakens, precious metals tend to perform well, creating a favorable environment for silver investments.12 In our view, if the US Federal Reserve were to pause in its tightening cycle or were to signal a more accommodative stance with potentially lower interest rates, the profitability of precious metals investments, including silver, could potentially strengthen. On the other hand, when interest rates increase, it raises the opportunity cost of holding precious metals, potentially reducing their investment appeal.
However, over the past decade, silver has shown a negative correlation of -0.15 with US interest rates, which is weaker than gold’s one at -0.41, while the correlation with equities is relatively stronger: Silver exhibits 0.26 with the Standard and Poor’s 500 (SPX) index while gold’s -0.09, indicating silver’s significant industrial demand and underlying its unique position as both a precious and industrial metal that makes it an appealing addition to portfolios.13
In addition, precious metals are often sought after when volatility is high, as investors seek investments that can potentially preserve their value in a volatile market. Precious metals remain a solid potential hedge against inflation and store of value in times of economic downturns and geopolitical unrest.14 Today, we expect persistent geopolitical risks, such as the lingering war in Ukraine, to keep them in demand. This implies that demand for silver as a store of value and an investment can dramatically swing prices, particularly given the volatile nature of such demand. Therefore, if owning precious metals becomes more attractive to investors, then silver prices could potentially rally significantly.
Before 2022, global demand for silver has remained aligned with global supply. In 2022, demand outpaced supply by 7,393 tons. Global consumption of PV silver powder in 2022 reached 140.3Moz (4,365t), almost triple the level in 2010.15 PV cell output grew faster than silver thrifting, helping boost silver global electronics & electrical demand. Additionally, vehicle electrification, power generation, and distribution investments benefited the sector. Thrifting and substitution (outside PV) were also minor, helping the total.16
In fact, one trend that has the potential to dramatically change silver’s supply and demand landscape involves increased solar power installations. Solar is entering a new age after nearly two decades of development. Due to the green economy and energy sovereignty awareness, installed capacity growth has outpaced predictions, and a technological breakthrough has brought new high-efficiency N-type cells with more significant silver loadings into mass production. Due to the move towards N-type cells and the promising future of PV installations, powder offtake should increase even though traditional cell silver loadings per unit declined.
Manufacturers have indeed invested heavily and made impressive progress in silver thrifting and substitution in recent years, mainly through process optimization, alternative materials, and improved cell structure design to reduce silver price volatility and enhance competitiveness. We expect that technology will continue to minimize silver intensity in most installations: silver is one of the most expensive components in solar PV cells and is, therefore, predicted to continue to decrease in material intensity by 30% in 2030.17 Nevertheless, silver powder use has increased with PV installation expansion and silver prospects are still bright as shifts between PV technologies counter thrifting.18
Overall, the usage of silver in solar panels translates to a faster rate of demand growth. Deployment of solar PV accelerates in all most recent International Energy Agency’s (IEA) scenarios, setting new records every year to 2030. In the IEA’s STEPS (Stated Policies) scenario silver demand is the highest in 2040 (17% higher than 2020), while in SDS (Sustainable Development) scenario silver demand is the highest in 2030 (90% higher than 2020 while in 2040 is 35% higher than 2020).19
The balance of deployment of solar panels varies by region and country. In the United States, China, and India, for example, solar PV are becoming the leading technology.20 India has increased enormously its imports of silver last summer. We can notice that by looking at inventories’ levels: the stockpile of silver, held in the LBMA vaults in London reached an all-time low in November and continued to be around record lows while COMEX inventories dropped very quickly too.21
On the supply side, changes in Mexican regulation will make it more difficult for mining conglomerates to be granted mineral concessions, increasing the risk that corporations may cut back on investments in new projects and putting Mexico’s status as the world’s top producer at risk.22 In addition, in the first four months of 2023, silver production in Peru fell by 7% year over year.23
Multiple market participants have raised scarcity alarms in light of the rising demand for silver brought on by the shift to renewable energy sources.
Silver bullion can be bought directly from precious metal dealers, who sell it at spot market prices. The advantage of physical ownership is that its value closely tracks the price movements of the broader silver market. This also allows owners to potentially physically possess the metal, giving them direct access to their investment. One downside is that dealers can charge premiums to buy and sell silver, which can dramatically reduce returns. In addition, there can be costs of storage, such as buying a safe or renting a safety deposit box. Moreover, when an investor sells physical silver, gains are currently taxed at a maximum of 28%.24
Silver mining stocks can offer indirect exposure to silver prices. These stocks tend to be leveraged plays on silver prices, owing to the high fixed costs of extracting the metal. Mining stocks are considerably more liquid than physical silver as they can be bought and sold during market trading hours. Silver mining stocks can also be advantageous from a tax perspective, as long-term holders are taxed at long term capital gains rates, which are currently at a maximum of 20%. A potential drawback is that investors are exposed to idiosyncratic risks associated with owning the stock of a particular company. To counteract this, investors may look to an ETF, which owns a broad basket of companies involved in silver mining.25 Exposure to the commodities markets may subject the funds to greater volatility than investments in traditional securities.
Paper trading of silver is conducted through the futures market. Paper trading provides investors with exposure to silver without needing to physically hold the metal, potentially improving liquidity and reducing the cost of ownership. Unlike the bullion market, futures markets can also allow investors to use leverage. One downside of futures is contango, when future prices of a commodity are higher than their spot price. This can erode gains over time, even if the spot price of silver rises. The use of futures contracts is subject to market risk, leverage risk, and liquidity risk. They may experience losses that exceed losses experienced by securities that do not use futures contracts. The use of leverage may amply the effects of market volatility.
Silver is a unique metal because it has properties of both a precious and an industrial metal. We believe this makes silver a useful portfolio holding as it can potentially appreciate in both environments where demand for precious metals can rise, such as during periods of heightened volatility, as well as in eras of strong economic growth where industrial demand is expanding. For long term investors, we believe that a basket of silver mining stocks is a desirable way of gaining exposure to silver, given their leveraged exposure to the underlying metal’s price movements.
SIL – Global X Silver Miners ETF
Click the fund name above to view current holdings. Holdings are subject to change. Current and future holdings are subject to risk.
1. Hoffman, J. E. (2015, January 28). Silver processing. In Encyclopaedia Britannica. (Accessed, 2023, June 15).2. Metals Focus. (2023, April). World silver survey 2023. The Silver Institute.3. Metals Focus. (2023, April). World silver survey 2023. The Silver Institute.4. Ibid.5. The Global Source Silver Institute Website. Silver in Industry. (Accessed, 2023, June 15).6. Metals Focus. (2023, April). World silver survey 2023. The Silver Institute.7. World Gold Council (2023, May 5) Gold Demand Trends Data Tables.8. Infinite Market Cap, Top precious metals by Market Cap (Accessed, 2023, June 15).9. Bloomberg, L.P. (n.d.) [Data set]. Volatility 90 Day Generic First Silver and Gold COMEX Futures. Retrieved June 15, 2023.10. Bloomberg L.P. (n.d.) The gold/silver ratio is computed taking the gold spot divided by the silver spot data from June 15, 1993, to June 15, 2023. (Retrieved, 2023, June 15)11. BullionByPost. Gold-Silver Ratio explained. (Retrieved, 2023, June 15)12. Bloomberg, L.P. (n.d.) [Data set]. Price (PX_LAST) Correlation Silver (XAG Curncy) and Dollar (DXY Index) and Silver and Real Rates (USGGT1 Index). Retrieved June 15, 2023.13. Bloomberg, L.P. (n.d.) [Data set]. Price Correlation Silver & Gold (XAU Curncy) and Nominal Rates (USGG10 Index) and Silver & Gold and Equities (SPX Index). Retrieved June 15, 2023.14. Bloomberg, L.P. (n.d.) [Data set]. Correlation Silver & Inflation (CPI Index), Silver & Volatility (VIX index), Silver & Global GDP (WGDPWR Index). Retrieved June 15, 2023.15. Metals Focus. (2023, April). World silver survey 2023. The Silver Institute.16. Ibid.17. Ibid.18. Ibid.19. IEA (2021, May). World Energy Outlook Special Report, The Role of Critical Minerals in Clean Energy Transitions20. IEA (2022, September) Technology deep dive, Solar PV.21. Bloomberg, L.P. (n.d.) [Data set]. Silver COMEX Inventories (COMXSILV Index). Retrieved June 15, 2023.22. Financial Times (2023, June 5) Mexican mining industry under threat from sweeping new regulations.23. Kitco (2023, June 07) Mining News.Silver production in Peru down 7% in January-April 2023, ministry says.24. INN (2023, April 11). How To Invest In Gold: Your Guide to Taxation on Gold and Silver Investments.25. Bankrate (2023, March 10). What is the long-term capital gains tax?
Real yields: A real yield is calculated by subtracting the expected inflation rate from a bond’s nominal yield. Real yields can be positive or negative, depending on the combination of the two.
Standard and Poor’s 500 (SPX) index: The Standard and Poor’s 500, sometimes known as the S&P 500, is an index used to measure the performance of 500 of the biggest firms listed on American stock markets. It is one of the equity indices that is most often followed.
LBMA Vaults: The London Bullion Market Association (LBMA) is a global trade association that represents the London market for gold and silver bullion. This covers the majority of the central banks that own gold, as well as investors from the private sector, mining firms, producers, refiners, and fabricators. Vaults provide secure locations for storing gold and silver bars (bullion), and act as gatekeepers to the Loco London Precious Metals Market. They are its custodians.
COMEX: COMEX is the primary futures and options market for trading metals such as gold, silver, copper and aluminum. Formerly known as the Commodity Exchange Inc., COMEX merged with the New York Mercantile Exchange (NYMEX) in 1994 and became the division responsible for metals trading.
Troy Ounce: A troy ounce is a unit of measure used for weighing precious metals that dates back to the Middle Ages. Originally used in Troyes, France, one troy ounce is equal to 31.21 grams, according to the U.K. Royal Mint. One standard ounce, used to weigh other items such as sugar and grain, is slightly less at 28.35 grams. The troy ounce is retained even today as the standard unit of measurement in the precious metals market to ensure purity standards and other common measures remain consistent over time. The troy ounce is often abbreviated to read “t oz” or “oz t.”
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