There is a strong case for silver as a long-term investment. When comparing investments, a typical period is 20 years from 2000 to 2020. During those two decades, the price of silver went from $5.00 an ounce to $24.00 an ounce (as of November 2020).
That is a roughly 5X or 500% gain. The index of premier U.S. large-cap stocks, the S&P 500, during the same 20 years, roughly doubled from $1,427 to $3,138 (average closing price so far in 2020).
Why is silver so desired?
High industrial demand
There is a high industrial demand for silver, accounting on average for 40-50% of total demand:
- Demand for silver's excellent electrical conductivity has increased with the increased number of electrical appliances that we use in our day to day lives. High-tech uses now include RFID tags that are now necessary in tracking shipments, tracking inventories, and tracking employees (ID badges).
- There is also a rising demand for silver's antibacterial properties within the medical sector -including a huge surge in use in biocidal products (any product or substance which is intended to destroy, control or prevent the effects of harmful organisms). For example, dentistry as a popular method of prevention and cure of infection.
Many investors view silver as a safe haven from financial and political turbulence
The balance of silver demand is for jewellery (also a long-term stable market), bullion coins, and investor/speculator demand through exchange-traded products. The latter two are volatile and sometimes extremely so.
The investment demand for silver is driven by concern for the stability of money - now threatened by massive central-bank money creation, seemingly uncontrollable budget deficits, and political instability.
None of these drivers of safe-haven demand seem likely to disappear anytime soon. As commodities, real goods like silver and gold cannot be inflated by government actions; having been the world's preferred "real money" for thousands of years.
When stock markets appear to be high-risk, many investors begin to move toward the classic hedge of putting 10% of their capital into gold and silver.
The short-term volatility of silver
It is crucial to be aware of silver's shorter-term volatility.
Silver is a tiny market easily driven by a fraction of the investment needed to move the needle on gold; the London Gold Bullion Market turns over 18 times more monetary value than the silver market.
What caused the 2011 spike in silver?
The silver price in the year 2000, as mentioned previously, was $5.00. By 2005, the newly beginning long-term silver bull market, paralleling that in gold, saw the silver price rise to $7.00 per ounce. Six months later, it was $12.61 per ounce. By the end of 2007, the price was $15 per ounce. Then, three months later, in March 2008, it hit $20 per ounce.
But, with the 2008 financial crisis and stock market crash,because of the severe credit crunch, silver's price plunged almost 60%, along with prices of all metals and commodities.
However, it wasn't long before the extensive "quantitative easing" by the U.S. Federal Reserve, with its zero-interest-rate policy and the "stimulus plan" funded by the U.S Government, had caused the silver price by 2011 to rebound to a 31-year high of $49.21 an ounce.
The price today of $24 per ounce is about half of the 2011 peak price of $49.00.
How has COVID-19 affected the silver price?
Another key example of extreme volatility occurred between 2011 and today.
The initial impact of the COVID-19 pandemic in March 2020 caused the silver price to drop from $17 an ounce to $12.00 an ounce in a few days. One month later, it had rebounded to $15 an ounce. With the government's massive spending and Federal Reserve easing in response to the COVID-19 lockdown, the silver price by early August 2020 had risen to $30 an ounce.
Inevitably, this gave way to a correction, so that the silver price today is $24—a 20% decline from the August high. The correction of the huge bull market in precious metals from March to August may only be beginning.
Changes on the supply side
Where is silver mined?
The mining of silver is heavily concentrated in the Andean countries (Bolivia, Chile, Peru, and Argentina) and in Mexico, China, Australia, Russia, Poland, and the United States.
Relatively few larger, established miners are primary silver miners. Almost always, silver is a byproduct of mining, for example, for gold, platinum, copper, or nickel.
How is silver mined?
Silver usually is combined with elements such as arsenic and chlorine and with ores such as argentite and lead. It is often alloyed with gold or other metals and must be extracted from them.
For example, Fresnillo is the world's largest producer of silver from ore (primary silver) but also Mexico's second-largest gold miner. A relatively rare pure silver play is Minco Silver Corp (TSX: MSV), hailed as "the largest pure silver play in China" and recently rated a buy by major investment companies.
A major silver miner right in the heart of the Andean silver region, Fortuna Silver Mines (TSX: FVI) is a diversified miner with mines throughout the region and produces 12.13 million ounces of silver and 12,800 ounces of gold.
How silver is becoming more profitable for miners
The powerful long-term gains in the silver price are making it possible for miners to profit from ores once not profitable to dig. The potential profit now attracts exploration by junior silver miners seeking strikes that are not necessarily world-class.
Another driver of the silver price will be a decline in mining production at least through the middle of 2021 as a result of COVID-19. This is because of the lockdown and gradual opening in several of the leading silver mining countries. Global silver mining production is expected to drop at least 7% this year.
Investing in silver
Investing in silver closely parallels investing in gold. But because silver is more volatile than gold, it also is considered a leveraged play on gold.
Coins and bars
Silver coins are minted by governments including the United States, Great Britain, and Canada for investors who purchase silver as a safe bet against turmoil in the financial markets or politics.
Silver bars of various weights are minted and purchased for the same reason: both are usually 99.9% pure silver.
Not surprisingly, with the global COVID-19 pandemic, silver bullion coin (as contrasted with numismatic coins for collectors) and bar sales surged 60% from 2019.
Exchange-traded funds (ETFs)
The first silver ETF, launched in 2006, has become a behemoth in the world silver market. iShares Silver Trust (SLV NYARCA) and other silver ETFs channel stock market funds into silver bullion, which they hold in trust against their shares. The result is that stock market investors, including mutual funds and hedge funds, as well as individuals have an easy way to invest in virtually any quantity of silver bullion.
That has made silver demand through SLV potentially explosive. In the wake of the COVID-19 brief March sell-off, as the silver price recovered, SLV's holdings by mid-August had rocketed to a new all-time high of 581 million ounces. That meant there had been 218 million ounces in silver-ETF demand just from SLV from March to August. It was unprecedented and off-the-charts. It is not surprising that the market corrected since then may have further to go.
Silver futures trading
Futures trading in silver, as in the silver market at large, is relatively small, dwarfed by such futures as copper and gold. It also is highly volatile.
With leverage as much as 38-1 available to futures traders who use it, a trader can control thousands or millions of ounces of silver by putting up less than 5% of the cost of a futures contract.
Silver mining stocks
The silver mining stocks leverage the price of the metal by 2x to 3X or more.
Leading silver miners have stable properties and multiple mines and are low-risk as companies. But they are leveraged like all silver miners because they have relatively fixed costs while the silver they sell can experience big price changes.
The mid-tier and junior silver miners have higher company risk (especially juniors in the exploration and mine-development stage) but greater leverage because the amount of silver they produce can increase significantly year to year.
Silver mining stock funds
Mutual funds with a portfolio of silver stocks have lower company risk than individual stocks—even if they hold only junior silver mining stocks—because they are diversified over several dozen companies in different countries (reducing political risk).
If the fund invests in juniors, mid-tiers, and majors, then it's risk is reduced further by this diversification. Many leading junior silver miners, like junior gold miners, are listed on the Toronto Stock Exchange (TSX) Venture Exchange.
Silver Mining Companies
Endeavor Silver (EDR) looked at the story of a mining company under market pressure since 2017 that caught the market's attention this year with the sharply rising silver price. Endeavor has three high-grade silver-gold mines in Mexico. This kind of "comeback" for a mid-tier producer is not unusual and points to the reliance of mining companies on conservative financing.
At the London Mining Conference, Chris Richie of Silver Crest Metals (V-SIL), talked about the company's diversified approach to the exploration, acquisition, and development stages of precious metals mines in Mexico's historic precious metals regions.
Silver Tiger Metals ($SLVR), has built three mines in Mexico and sold two already to major gold mining companies. This is a highly profitable option for any junior company that makes a highly prospective strike, especially if it brings the mine to operation.
Reyna Silver (RSLV), a Toronto-based company with promising mining property in Mexico that has targeted risk reduction by investing in a top-notch team of geologists for exploration, maintaining a strong cash position, and having properties in stages of exploration, development, and production further to diversify risk.
Extensive knowledge of the silver mining industry, individual stocks, and top company executives is essential in judging these early-stage miners.