For over 4,000 years silver has been regarded as a form of money and store of value.
It is widely used in the production of coins, jewellery, silverware, chemical reactors, catalytic converters, photographic film, computers, solar panels and electrical conductors. It exhibits the highest electrical and thermal conductivity of any metal. Silver is more cyclical than gold due to its primarily industrial applications. Although silver is much cheaper than gold, the prices of the two metals often move in tandem. Gold and silver have historically been hedges against uncertainty, holding value well in economically challenging times. Given their popularity as safe haven assets, investor sentiment plays a substantial role in their price movements.
One of the most impressive rallies of 2020 has been the increase in the price of gold and silver. Gold is trading at price levels not seen since late 2011 and silver is trading around five-year highs. The recent silver rally follows a period in which gold significantly outperformed silver. The gold-to-silver ratio, which shows how much silver it takes to buy gold, best illustrates this. The ratio’s 30-year average is about 65, but spiked at 120 in April; the highest on record. This suggests that silver was extremely undervalued relative to gold, so the silver rally may not be entirely unexpected. The ratio is currently 80.
Anaemic global bond yields should support investment demand for gold and silver into the foreseeable future. Amazingly, $17 trillion in global debt bear negative yields. In addition, many positive yields are so low that it does not outpace inflation. Investors are increasingly turning to silver and gold as inflation hedges as opposed to bonds and cash. Bond yields will likely remain low, since the US Federal Reserve anticipates that it will leave its interest rate at rock-bottom until at least 2022. Simultaneously, many countries are drastically expanding money supply to promote inflation, which generally translates to higher precious metal prices. The COVID-19 pandemic has also led to various mine closures throughout the world, reducing the supply of metals, including silver. This is a positive shorter-term catalyst for silver prices.
The recent shift in the silver supply-demand curve has led to it becoming a popular asset choice for cautious investors. Its ability to hedge against inflation and currency swings, as well as its low historical correlation with shares and bonds offer investors portfolio diversification benefits. Local investors can consider the NewWave Silver exchange-traded note (ETN). It provides investors with cost-effective exposure to the spot price of silver in a listed instrument trading in rand. Alternatively, investors can invest indirectly in silver by buying shares in listed silver mining companies. This allows for possible dividends, the added advantage of experienced management teams and leveraged balance sheets. In this regard, the Global X Silver Miners exchange-traded fund (ETF) provides such exposure for offshore portfolios.
Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. NewWave Silver ETN shares and Global X Silver Miners ETF shares are held on behalf of clients.