Investors big and small, domestic and foreign, have piled heartily into gold since the start of the COVID-19 bear market in stocks. Gold is one of the best performing assets classes in the first quarter 2020, yet silver remains depressed.
Many investors wonder why.
The short answer is that 1) silver reacts more to commodity cycles than gold due to its large industrial demand and 2) investment demand has weakened since the 2011 price high.
If you are considering a new investment in silver now or have been disappointed in the recent performance of your silver holdings, Blanchard and Company will discuss the larger outlook here.
Quick take: current silver prices offer individuals one of the best buying opportunities in the precious metal since late 2003.
Why Invest in Silver?
Just like gold, there are many reasons to invest in tangible assets like silver. These are broader reasons to buy silver, and don’t include the current market dynamics, which we will cover later on in this in-depth report.
Here are three of the many reasons that investors diversify into silver.
1. Silver is a precious metal like gold. Yet, it is also so much more.
It is a physical commodity widely used in a vast array of industrial purposes. Industrial demand for silver could slow in 2020 amid a slowdown in global economic growth in the wake of the coronavirus pandemic. Yet, silver industrial demand is expected to continue to expand broadly in the years ahead fueled by growing applications in electronics, solar panels, electronics and more. New industrial uses are being found for silver almost monthly it seems.
2. It is a monetary metal (quasi-money).
Yes, it’s money. Silver has been used as money for over 4,000 years. Even recently, in China prior to the communist takeover in 1949, the primary currency used there was U.S., Mexican and Cuban silver coins. After the communists seized control, the new government ordered all the silver to be turned in. This is a useful explanation of how fairly recently silver still was used in daily transactions as money. Its size and lower cost value versus gold make it an excellent transactional form of money. Some individuals who purchase physical silver today view it as in investment in an asset that could again be used for daily commerce, while others accumulate silver as a portfolio diversifier and store of wealth.
3. Silver is also a financial asset, a store of value and a proven portfolio diversifier just like gold.
Research by the CPM Group reveals that the optimal level for silver portfolio diversification is around 5-10%, with benefits up to 25% of one’s portfolio based on historical results from 1968 through 2018. Portfolios with silver allocation yielded better returns, with lower risk.
Let’s look at some recent history, before analyzing current silver market dynamics and forecasts.
The Long Bear Market
Since trading at $49.80 on the New York spot market in 2011, silver fell into a commodity bear market cycle. Silver is more influenced than gold by traditional commodity market cycles due to the large amount of industrial demand for the metal.
In commodity markets, high and low cycles reliably form.
Why? High prices encourage production by miners – as they see an opportunity to cash in on the high prices. Since then, silver fell to a New York spot low at $11.75 last month. We believe the low is now in.
There is an old saying in the commodity world: “The cure for low prices, is low prices.”
When you think about it, it makes perfect sense. High prices encourage mining production, which is what occurred in 2011. That creates a glut of supply and the surplus we have seen in silver in recent years.
Meanwhile, low prices decrease production as mining is less profitable, which is turn creates a supply squeeze.
Because of the large industrial demand for silver, the supply/demand conditions that dictate commodity market cycles have a larger impact on the price of silver versus gold.
Experts are optimistic that the silver bear is bottoming out right now. Silver is already showing signs of turning higher following last month’s liquidity wash-out, where investors sold hard assets like silver to cover margin calls in the stock market crash.
Don’t forget, part of the reason silver climbed to nearly $50 an ounce in 2011 was amid America’s debt ceiling crisis with widespread concerns the U.S. could default on its debt. The S&P ratings agency issued a negative outlook on US AAA debt, for the first time in history. In August, S&P downgraded US debt in a major slap in the face and warning signal to US policymakers from AAA to AA+.
Into the 2011 high, there was massive investment demand for silver as a monetary metal and store of value.
Once U.S. policymakers addressed the debt ceiling, investors began to take profits on silver which had climbed from a low around $8.75 in 2008 into the $49.80 New York spot high in 2011, and that combined with increased silver production (supply), the bear market began. We are likely at a new inflection point and expect rising investment demand for silver to continue throughout 2020.
Three Major Drivers for New Uptrend in Silver
Here are three key factors that will drive silver higher in the years ahead.
1. Falling supply
Total annual silver supply is declining. After peaking in 2016, silver supply fell in 2017, 2018 and 2019.
The global economy is already forecast to skid to its deepest recession in 40 years in the wake of the COVID-19 pandemic. Slower growth will decrease mining production, which will decrease silver supply, setting the market up for a shortage as we emerge from the recession.
2. Increasing industrial demand
Solar panel use hits new records in 2019. Jewelry and silverware demand remains strong. Electronics demand continues to climb for the past five years. New innovative uses for silver are increasing industrial demand, which will hit an important inflection point as we come out of the recession with a physical shortage. The supply/demand imbalance will be a major factor propelling silver higher in the next bull phase.
3. Rise in investment demand
Just as we saw in the 2008-2009 crisis, investment demand soared amid concerns about fiat money devaluation and a loss of confidence in government and rising government debt levels. We saw a massive surge in physical buying in silver over the last month. This will continue to expand as the recession deepens and the central bank continues its experimental money printing policies and the Federal government continues on an unsustainable path of reckless government borrowing. Investment demand will soon become another major driver in the new bull market in silver.
Intermediate-Term Buy Recommendation
In December 2019, CPM Group issued a silver buy recommendation for investors with an intermediate-term investment horizon, which CPM puts as a two- to three-year time horizon.
“The silver market is at a critical vertex at present,” CPM Group’s Vice President in charge of Research Rohit Savant said in announcing the buy recommendation. “Silver market fundamentals are precariously similar to the critically poor conditions that existed in 1989. Our expectations are that the market may avoid the long period of net investor silver selling and low prices that followed from that year, however. Prices seem more likely to rise in the years ahead rather that to decline. There are many external as well as internal factors behind our analysis. That said, super bulls will continue to be disappointed by silver.”