Managed funds: Max Riaz sees a silver lining
Gold has been the precious metal to watch but attention could swing to silver thanks to its industrial uses
While most investors have their attention trained on the stratospheric rise of iron ore and copper prices this year, many are yet to fully appreciate the potential for silver. Its price also had a strong rally between March and August of 2020, when it shot up by 100% from $14/oz to $28/oz but has since stabilised at this level. Could it go any higher? Well, in the past two major price peaks of 1980 and 2011, silver’s price rose to $38/oz.
Its surge in 2020 came on the back of wallstreetbets’ retail investors (yes, those guys again) looking to repeat the strategy they used in the GameStop short squeeze. But to be fair to fundamental investors, silver started to look interesting in mid-2020 and gained more interest on the back of Joe Biden’s presidential election bid and subsequent win.
The fundamental story for silver stacks up nicely: a precious metal with industrial application providing exposure to electrification, decarbonisation, safe haven role (alternative to gold) and quantitative easing. The pandemic era exuberance of retail (social) punters is likely to bring speculative funds into silver’s trading, which could see price volatility. This may not be palatable to some genuine investors and detract from what might otherwise be a good investment proposition.
Silver has industrial application (which makes up most of the demand-side equation) and its price should move around with customers’ restocking/destocking cycles and mined/production numbers.
Mexico is the world’s largest producer, and demand sits at about 1 billion ounces a year. We could see demand exceeding supply on the back of lower mined volumes due to Covid-19-related shutdowns and lower recycling volumes, which have been impacted by lower prices.
The global silver market was in deficit in 2019 (physical plus exchange traded products); however, excluding ETPs global supply was ahead of demand. The deficit may increase if ETP demand continues to pick up. Indeed, there were signs of this in January when BlackRock’s iShares Silver Trust saw an unprecedented $944 million in net inflows on one day alone. Much like gold, silver enjoys a safe haven status, and this clearly provides a level of price support as long as Covid-19 lingers and the path to economic recovery is uncertain. Hence, we may see investors gravitate towards silver more than gold due to its industrial application.
How do we get to higher silver prices? What will drive them higher is increased demand from electrification/renewables, the correlation to higher gold prices (goldto-silver ratio), diversification away from gold and market uncertainty (geopolitical and macro risks).
The full extent of the impact from renewables (solar, for example) on future prices remains uncertain, in our view, but could really move the needle. President Biden has a clear target of moving to a green future, with other countries such as China on a similar path. Specifically, on solar panels Biden has an ambitious target of installing 500 million solar panels within five years and the elimination of carbon pollution from power plants by 2035. Silver comprises 6% of the total cost of each solar panel, which is a material amount.
So with significant genuine demand for silver and a supply side struggling to keep pace, it is not hard to imagine a yet stronger price over the near to medium term.