Reasons to invest in Silver
2023 is an excellent year for investors to take advantage of Silver as an Investment, whether they choose to invest in physical Silver or Silver mining stocks. The combination of higher demand for Silver, coupled with the undersupply of physical Silver, has created a bullshit situation for Silver investors.
Moreover, during a Precious metals bull market Silver is likely to outperform Gold for a number of reasons:
- History demonstrates that Silver outperforms Gold when the price of Precious metals is rising. Past performance does not guarantee the future, but it is reasonable to assume that history will repeat.
- Retail investors may prefer Silver over Gold because of the lower price per ounce. The lower price allows investors to accumulate more ounces of metal and to make more frequent purchases.
- The Silver market is much smaller than the Gold market so a single Dollar invested in Silver has a larger impact on the price of the metal than it would if it were invested in Gold.
- Based on the Gold-to-Silver ratio, Silver is dramatically undervalued relative to Gold.
- Demand for physical Silver is already overwhelming available supply and the bull market is just getting started.
- Silver benefits from both investor and commercial demand (solar panels, electric vehicles, etc.). Gold does not have significant commercial demand.
In this short article we will explore the reasons to invest in Silver.
Silver supply deficit
Demand for Silver has grown substantially in recent years due to industrial use and investor interest. Even though Silver production picked up again in 2021, growing by around 5%, total global Silver demand rose by 19%, its highest level since 2015. The demand for Silver Coins and bars for Investment rose by 36% as investors recognized the potential for the price of Silver to increase. Furthermore, Silver demand has been growing steadily in recent years because of its wide industrial use, particularly within the green energy sector (solar panels and electric vehicles).
There was a substantial decline in Silver mining activity during Covid19, which has resulted in the market being undersupplied. Mining companies will need to ramp up production to solve this issue in the long run, especially as demand is likely to remain strong. However, only around 30% of all the Silver mined comes from primary Silver mines, while the remainder comes from miners who also focus on Gold, zinc, and other metals. More pure-play Silver mining projects are needed. Overall, this setup is very bullish for the price of Silver in the long run, especially as demand growth is likely to continue this decade.
Higher return potential
The price of Silver is volatile, and if you invest in Silver mining stocks, you can expect to experience even more volatility in your Investments. This volatility is a positive point for investors aiming for higher returns. Moreover, investors can control the volatility by choosing different types of Silver Investment products. Physical Silver offers less volatility and lower returns, while junior mining companies offer higher upside with an increased drawdown potential. Silver mining ETF products (e.g., GDX and GDXJ) can be favorable middle-ground products, as they are less volatile because they invest in a basket of mining companies.
The price of Silver has had a double-digit increase or decrease every year since 2019. Nimble traders profit from this volatility by playing both directions of the market. Silver rose by a record 44% in 2020 while the relatively lower performance in 2020 and 2021 (10+% decline) means that we could currently be at a good entry point.
Silver also has the potential to outperform Gold during bull market periods. For example, if you compare the performance of Silver mining ETFs since 2012, you can see that Silver mining ETFs had higher peaks during bull runs and that Gold mining ETFs have unperformed Silver mining ETFs on a long-term basis. However, Silver mining ETFs have had stronger drawdowns in the past year due to weaker performance in the Precious metals market. Based on history, it is clear that you may be able to outperform Gold during a Precious metals bull market if you invest in Silver.
Industrial and consumer use supports Silver’s growth
Unlike Gold, demand for Silver can be driven by its wide industrial usage. Because of this, there will likely be strong demand for Silver in the next decade as the green energy movement expands and demand for electric vehicle grows.
According to the World Silver Survey, the main uses of Silver include the following: Industrial ( 50.7%), photography ( 2.8%), physical Investment ( 24.5%), Silverware ( 4.2%), and jewelry ( 17.8%). The main industrial uses of Silver include solar energy, medical devices, and electric vehicles.
Silver is a very important component of solar panels. An average two-square-meter solar panel uses around 20 grams of Silver (2/3rds of an ounce), and this industry uses around 8% of the Silver produced annually.
Electric vehicles need Silver
Silver is also an essential component used in electric vehicles. The growth of EVs presents a bullish setup for Silver, as the growth of EVs only really began during the past decade. In 2011 only 55,000 electric vehicles were sold. This number increased to 10 million during 2021 and will likely increase moving forward.
Silver is also widely used for other consumer products, including smart phones, electronic devices, jewelry, and Silverware. Consumer products account for around 33% of the total demand for Silver.
Silver’s use in solar panels and electric vehicles is intriguing, as this is a way to access the growth of Investment trends related to increased renewable energy. Furthermore, consumer goods that use Silver (for example, smart phones) should experience a consistent level of demand, even during recessions or inflation, as they are common and relatively inexpensive items.
Gold to Silver ratio
The Gold-to-Silver ratio is an indicator used to determine whether Silver is undervalued or overvalued relative to Gold. The average Gold-to-Silver ratio over the past fifty years has been 56, compared to the current ratio of 83.6.
Silver has historically done very well when the ratio is over 80. The high ratio indicates that Silver is undervalued relative to Gold. Think of it this way - even if the price of Gold remains constant around $1760, the price of Silver would be $31.50/ounce if the current Gold-to-Silver returns to 56.
It is expected that the Gold to Silver ratio will return to its historic norm as industrial and investor demand for the white metal continues to expand. Some Silver analysts believe the ratio will drop all the way to 8 because that reflects the ratio at which Silver is mined from the Earth (8 ounces of Silver for every 1 ounce of Gold). With Gold at $1760 and the ratio at 8, Silver would be priced at $220 per ounce.
Multiple options for investors
Investing in Silver is very convenient for retail investors because there are many options available and the cost is low relative to Gold. Investors can choose to invest in physical Silver, Silver-backed Trusts and ETFs, or mining stocks to gain exposure to the price of Silver. Silver mining stocks are generally more volatile and offer higher returns than physical Silver during bull markets. However, mining stocks also have higher drawdowns during bear markets.
Physical Silver is less than $22 per ounce currently (November 2022), which means that it is very convenient for retail investors to purchase Silver on a monthly or even weekly basis. Most investors can afford to set aside $100 per week or per month which means their Silver holdings will steadily grow.
There are many Silver ETFs that invest in physical Silver, junior mining companies, and other Silver mining companies. These products are more volatile and have the potential to outperform the price movement of Silver during a bull market. However, the performance of these products can also resemble broader market performance, which means they can decline during macroeconomic and politically risky events.
Silver mining companies
Investors can also take the time to research Silver mining companies and make a concentrated bet on individual companies instead of buying a broad-based ETF. Mining stocks are risky so do your due diligence before investing, particularly in the junior mining stocks which are often touted online.
Geopolitical risks could cause the price to increase
There are 24,000 metric tonnes of Silver produced globally each year and this Silver is mined in just a few countries. For example, Mexico produces around 5,600 MT, China produces 3,400 MT, Peru produces 3,000 MT, Chile produces 1,600 MT, and Australia produces 1,300 MT. Together, these five countries control 62% of global production, while Mexico, Peru, and Chile collectively control 42.5% of the market.
Mining supply disruptions in any of these countries could significantly impact the market by causing a further supply deficit. Political risks in countries like Chile or Peru could temporarily disrupt the market, especially since the current supply of Silver has not been keeping up with global demand.
Any supply disruption would be favorable for physical Silver investors, as it could cause the price of Silver to rise. If you own Silver mining stocks that operate in the affected country, however, a supply disruption could negatively impact your Portfolio.
Now is a great time to increase your exposure to Silver or to begin building a position in Silver. In this article we have covered some of the reasons to invest in Silver – let’s do a quick recap:
- There is a supply deficit of physical Silver. Demand from investors and industrial users is overwhelming available supply.
- Silver historically outperforms Gold when the Precious metals are in a bull market.
- Industrial and investor demand for the white metal continues to expand. Solar panels and electric vehicles are a significant, and growing, part of this demand.
- The Gold to Silver ratio shows that Silver is undervalued relative to Gold. It is expected that this ratio will drop to its historic average (or lower).
- Investing in Silver is easy because of its low cost and the multiple options for gaining exposure.
- Geopolitical risks in the countries that mine Silver could result in higher prices.
Visit our Investing in Silver page to learn more about Silver and how to invest in the white metal.
About Satori Traders
Hi, my name is Bryan Post and I love the shiny stuff - Silver and Gold.
I've been investing in the Precious metals and mining stocks since 2002 when I realized that Gold is the only real money on the planet.
Here on SatoriTraders.com I share everything I've learned about the metals, Financials markets, trading, Technical analysis, and the numerous games that central banks play with fiat currencies.