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BookmarkThe recent major selloffs in silver have given (SLV) investors an excellent chance to accumulate a long-term position in physical holdings and silver companies. As the price has come down I have been recommending for some time to dollar cost average and/or pyramid down into silver and silver equities. So what is the path to a surge in silver prices? My primary thesis, much of which is laid out in the background section here, is that the endless easy money policies from central banks around the globe have created a long-term tailwind for the various precious metals. Despite the short-term pressure on the metals, the Federal Reserve’s continued accommodative and dovish policies should create a weaker dollar in the long run, inflation and in turn, bolster the prices of gold and silver. This thesis rests on silver being treated as a precious metal. Precious metals hold value and increase their buying power when inflation ticks up. While this has yet to occur in the U.S., it will be a likely result of a diluted money supply. While gold is the ultimate hedge against inflation, other precious metals, such as silver, platinum and palladium all tend to move higher when inflation creeps up. Gold has long been considered the best of the precious metals, but as its price has been driven up, retail investors have turned to silver as an alternative precious metal. Unlike gold, the great thing about silver is that there is huge industrial demand as well. The second key driver that I believe could cause a surge in silver in the next few years off the recent lows is the multiple sources of demand for the metal, in particular technology.
Where Demand for Silver is High
Precious Metal Demand
There was a significant shortage of both American Silver Eagles from the US Mint as well as junk silver available (that is, pre-1965 US dimes, quarters and half dollars) earlier this year as a result of record high demand. Further, silver ETFs have continued buying silver bullion at a record pace. Thus, demand for the metal is there from physical investors, and has helped keep silver above the $22.00 mark. In fact, the $22.00 mark has served as the floor for silver in the April decline and the large decline in the current week of May 13-17. This mark serves as an important technical resistance point. It has bounced off this level twice since the major selloff two weeks ago. Aside from silver being a precious metal, it also has many industrial and technological applications. Therefore, there will always be some level of demand, but such demand should pick up significantly when the global economy comes fully out of recession.
Despite the stock markets in the U.S. setting all time highs, the broader economy is still just limping along. The most recent Q1 GDP numbershowed expansion of 2.5% but was far below consensus estimates of 3%. Further, the jobs picture has yet to improve markedly, though unemployment has come down, albeit slowly. This slow growth has led to industrial demand for silver, but the growth is slow enough to keep the Fed on the easing accelerator which bolsters the precious metal side of the metal.
Industrial Demand
When the economy rebounds, there will be a spike in demand in many areas. The demand will not be just in coin and bullion form, but also in jewelry, silverware and dentistry. On the technology front, silver is one of the most conductive metals out there, and thus is utilized in photography, electronic devices, optics, medical devices/tools and most recently, in nanotechnology.
One of the factors driving the forecasted improvements is demand for ethylene oxide, an intermediate chemical in industrial processes that requires silver. The production of that and other intermediaries will help the US run counter trend to other industrialized nations, which according to Thomson Reuter GFMS (links to reports available for purchase) predicts will see slow growth. In absolute terms, GFMS expects China to achieve successive record highs in terms of its industrial use of silver over the forecast period, along with the US.
Robust growth in demand from the auto sector is also expected, and will help further underpin the performance of the electrical and electronics segment. Auto production is expected to rise, boosting silver usage due to the growing number of units. However, auto-related silver demand has already outpaced production because of the growing number of electronic accessories in each unit. GFMS expects this trend to continue as features once reserved for luxury vehicles become more standardized. Improvements in the economic backdrop are also expected to boost silver demand from the housing and construction industries.
One lesser known growth area for silver use is in technology, and that is where a lot of demand will be generated as we further delve into an era dominated by Apple (AAPL) iPhones, iPads etc. and its competitors’ similar products. Apple with its millions of iPhones sold has created massive industrial demand for silver. As its sales are strong this demand will continue. In fact, there is an average 20 cents of silver now used in each cell phone. While that is not much for a single phone, considering there were nearly six billion mobile subscribers worldwide in 2011-2012, a number that’s growing here in 2013, it becomes clear that new phones will always be in demand. Using the average of 20 cents a phone, we generate demand for over $1 billion worth of silver in just new mobile devices alone. There is a lot of silver in old cell phones, photography chemicals or medical devices that already have been taken out of the market. Although there is a push to recycle electronics and reclaim costly elements like silver within them, in situations where silver is used in very small portions (such as new smartphones), it is not cost-effective or even practical to recover the silver. Thus, new silver will be utilized in these devices.
From a Technical Perspective, Look to the Gold-to-Silver Price Ratio
At the time of this writing, silver is priced around $22.50 an ounce, approximately 60% off its recent highs set in April of 2011. Gold is currently priced at about $1,385 an ounce. That represents a 62 to 1 gold-to-silver price ratio, whereas the historical ratio is 16 to 1. The respective prices of gold and silver have not approached this historical ratio in many years, and I believe a reversion is long overdue. To achieve this reversion, gold would have to fall over $1,000 an ounce or silver will have to rise at a greater rate than gold in value in the coming years. I believe the latter is far more likely than the former, especially in a climate of endless monetary easing. Combine this with the rising demand in the technology sector and the fact that industrial demand will return in full force once we have moved completely out of the recession and we have a strong case for an investment in silver. The ratio has crept up year to date, but it has generally been in the 50-54 range for some time.
Physical Assets Are the Best Way to Own Silver
In my opinion, the best way to invest in silver is through physical bullion or coins. There are dealers in most cities and merchants on the Internet where you can buy silver bullion bars and/or coins. I not only consider physical silver as a wise investment given government stimulus, but I also consider it to be a form of insurance in case of a total breakdown of the fiat currencies and modern financial systems we have in the world today. If you decide to invest in physical silver assets, do so by only buying from a reputable dealer. The only downside from Internet purchases is high shipping and insurance costs as well as the possibility of a required minimum purchase. Whenever possible, buy locally to avoid such excessive shipping and handling fees.
Conclusion
I maintain that long-term precious metals stand to gain significantly from balance sheet expansion at central banks and currency debasement. Gold is an excellent play off of the stimulus coming from governments worldwide, but I believe silver and silver companies may outperform gold in the next few years. With the Federal Reserve once again reiterating that they will maintain their accommodative stance the long-term tailwinds are in place for the precious metals, despite recent price action and technical selling. However, silver is not only a precious metal currency, but also has massive industrial and technological demand, particularly in the technology sector. Smart phones alone generate billions of dollars in silver demand, much of coming from tech giant AAPL. This article presents some bullish evidence to argue in favor of silver and I believe each approach outlined can be profitable on the rebound. Physical is my preferred way to go but the ETFs mentioned in this article are not exhaustive. Further, money can be made with them. At current levels, I believe silver and silver companies are significant opportunity buys, especially for the long-term investor.
