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Silver – The Perfect Investment and Risk Protection Vehicle –

Silver – The Perfect Investment and Risk Protection Vehicle

Viewed as both an industrial and precious metal, silver can offer versatile risk protection for market participants. Like gold, silver offers a historically low correlation to assets like stocks and bonds.

Bob Iaccino For CME Group – When investors search the commodity space with an eye toward metals, they are often torn between investing in precious metals (gold, platinum) or industrial metals (copper, aluminum).

A bridge over this gap between precious and industrial metals is silver. When market participants analyze silver, they are looking at a precious metal and industrial metal at the same time. It’s almost as if one is blending gold futures and copper futures into one contract.

Silver is a valuable precious metal that has been used as a form of currency and store of value for thousands of years. It is less expensive than gold, depending on the circumstances, which may make it more appealing. The lower price makes it more accessible for investors with smaller budgets who may be frightened by gold’s four-digit price.

In addition, silver is more abundant in the earth’s crust than gold, which can make it more readily available and potentially less susceptible to supply shocks and the volatility that accompanies those shocks.

Then there is the perception of precious metals as inflation hedges, which can support silver prices during economic uncertainty. While gold is most commonly cited as a safe haven metal, silver can be a viable investment option as well when determining the trajectory of inflation and Fed rate hikes, for example.

Precious Metals Abundance in Earth's Crust (parts per million)

Precious Metals Abundance in Earth’s Crust (parts per million)

CME Group

Silver also has a variety of industrial uses. It is a highly conductive metal, making it an important component in many electronic and electrical products. It is used heavily in medicine, renewable energy (as in the production of solar panels), mirrors and water filtration systems. The demand for silver from these industries can help to support its value from an industrial perspective. Are we headed into a period with the possible acceleration of sustainable energy products and a home-building boom? If so, investors may consider how much silver will participate in this scenario.

Correlation to Equities, Treasuries and Currencies

Like gold, silver retains a relatively low correlation to assets like stocks and bonds. In the 180 trading days ending June 28, the July silver futures contract had a positive 58 correlation to the Dow futures, a positive 51 correlation to S&P 500 futures, a positive 39 correlation to Nasdaq 100 futures, and a positive 71 correlation to the 10-year note futures.

Silver does, however, have a historically strong inverse correlation to the U.S. dollar. Dollar volatility often equals silver volatility, but this would be true for gold, copper, and most other metals. Over the same 180 trading day period, silver futures have shown a negative 86 correlation to the dollar. If the Fed decides additional interest rate hikes are necessary, silver could be affected with more rate increases and a stronger dollar.

Silver is often overlooked when considering the best general metal to express a view on the direction of the economy or other asset classes. But like many well-constructed hedges, this versatile metal could also add versatile risk protection and mitigation for traders when appropriately used.

Rather than just abandon the metals space when the question becomes “precious or industrial?” Silver might be the perfect investment vehicle to answer that question.

Demand for Silver Is Greater Than New Supply…Will It Matter?

Silver production is failing to keep up with rising demand. But you wouldn’t know it by looking at the silver price says Clint Siegner.

Phillips Baker, CEO of Hecla Mining and Chairman of the Silver Institute, the metal’s most prominent industry trade group, recently made a presentation at the London Bullion Market Association Global Precious Metals conference in Spain.

The presentation focused on silver’s expected role in the transition to green energy, but it included some interesting detail on the market in general.

According to the Institute’s press release,

“Delegates asked Mr. Baker whether we will have enough silver for the green transition. He replied in the affirmative, explaining that while the silver market is currently in a structural deficit, above-ground stocks of silver will be mobilized to meet the demand.”

He added, however, that:

“there are no new significant silver deposit discoveries at present, and that geopolitical issues and mine permitting delays continue to be encumbrances to bringing new sources of mined silver supply to market.”

According to the 2023 World Silver Survey, demand outstripped supply in 2022 by nearly 238 million ounces – “possibly the most significant deficit on record.” Supply was about 20% short of what was needed to maintain equilibrium.

Silver demand rose in nearly all categories:

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Meanwhile, mine output fell versus the prior year – confirming what the Hecla CEO said about the difficulties miners face in bringing new production online.

It is getting harder to find high-grade deposits, and it is more difficult and expensive to develop and operate a mine.

The structural deficit in silver has now run for two years consecutively. The shortfall was 50 million ounces in 2021. The massive imbalance between supply and demand should have generated an explosive move in the price last year, but it didn’t. The paper price of silver finished just 4% higher for the year.

The data for 2023 won’t be available for months, but another deficit is likely this year – making it the third consecutive year of deficits.

The shortfall must be met by pulling silver from above-ground supplies. There are well less than 2 billion ounces available on exchanges and other publicly disclosed silver stockpiles across the globe, and, beyond that, the amount of silver in the form of coins, bars, rounds, silverware, and other scrap is less known.

To be sure, the massive supply of paper silver contracts that can be created on the trading exchanges – especially with the use of leverage – does create the potential for abuse, manipulation, or price dislocations.

However, with silver demand outpacing new mine supply each year, these supply deficits seem likely to put upward pressure on the silver price in the coming years. In the end, actual physical silver, not paper, is required to satisfy physical demand.

Silver Market – Giant Base Pattern Completing

Clive Maund – In considering the outlook for silver it is crucial to compare and contrast the long-term charts for silver and gold, since they tend to move in unison. As we saw in the parallel Gold Market update, gold is now very close to breaking out upside from a multi-year consolidation pattern, and so, although silver is still has a ways to go before it can do likewise, if gold breaks out it will “take silver along for the ride.”

There are two key points to observe on the long-term 20-year chart for silver. One is that the huge Cup & Handle base that has formed in it since 2012 – 2013 which is therefore of about 10 years’ duration, parallels the giant Cup & Handle consolidation pattern that has formed in gold over the same period. So if gold breaks out upside then silver will too, but unlike gold which will quickly attain new highs, silver will have a considerable amount of resistance to chew its way through before it can make new highs as it is still a long way below its 2011 highs. This brings us to a related point which is obvious when you compare silver’s long-term chart to gold’s which is that silver has markedly underperformed gold since its 2011 highs.

However, this is not something to worry about – on the contrary, it is quite strongly bullish, because it is a sign of excessive negative sentiment towards the sector of the sort that leads to a major new uptrend developing.

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Moving on, the 5-year chart shows the latter part of the Cup and the Handle of the giant Cup & Handle base in much more detail. Basically, the price has been meandering around rather aimlessly since the dramatic surge in the middle of 2020 to complete the right side of the Cup, in the process marking out the Handle of the pattern, but without reference to long-term charts, you wouldn’t have a clue what was going on.

This is essentially a giant slightly down sloping trading range and with the benefit of hindsight, we can see that it would have been profitable to trade the larger of the swings within this trading range, in particular, the rally off quite strong support from last September’s lows. The main point though, as we can clearly see on the 20-year chart, is that on a proportional basis the Handle of this giant base looks about complete, meaning that we can expect to see an upside breakout soon into a larger uptrend and this accords of course which what we have observed on gold’s long-term charts.

Before leaving this chart we should note that silver is quite a long way from breaking out above the resistance marking the upper boundary of the Cup & Handle base which is approaching and at $30, and it has quite a lot of resistance to work its way through on the way up.

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Next, and largely for the sake of completeness since it is virtually useless for technical purposes, especially without reference to long-term charts, we will take a brief look at the 6-month chart. This shows the price meandering around in a rather aimless manner. The rally over the past week or so has brought it up to a resistance level that could send it lower again, although it shouldn’t drop by much. Once it breaks above this resistance, the next stop will be the resistance in the $25.25 – $25.50 area.

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We will end by taking a quick look at the silver-to-gold ratio – this section is a copy and paste from the Gold Market update for convenience. The long-term 20-year chart for this ratio enables us to see major inflexion points in the past.

The rationale behind the interpretation of this chart is simple – when investors are very bullish on the Precious Metals they tend to to favor silver over gold in order to leverage gains, since silver’s swings tend to be bigger than those of gold, so excessive bullish sentiment as shown by a high Reading for this ratio tends to be seen at tops, such as was the case in May of 2011, but when investors are excessively cautious towards the sector, they tend to favor gold over silver, as it is regarded (rightly) as a safer investment. So times of excessive pessimism towards the sector are indicated by low readings of this ratio, such as we are seeing now, even though it is off the lows.

The current low readings are thus a fertile environment for the birth of a major new sector bull market. Note that the freak Covid Crash lows of March 2020, when orchestrated paranoia was at a peak, can be disregarded.

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In closing the main point to keep in mind with reference to silver is to watch for gold breaking above its key $2100 level which should kick off a major uptrend, because if that happens it will take silver with it and although silver has resistance to contend with on the way up it will be emboldened to forge ahead regardless if gold really takes off soon as expected.

 

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