Silver Demand Remains Exceptionally Strong

| About: iShares Silver (SLV)

The recent major sell-offs in silver have given (NYSEARCA: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 sell-off 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 number showed 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 (NASDAQ: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.

A few ways to play

There are three ways investors can get exposure to silver. My top approach for silver exposure is purchasing physical silver bullion and coins, followed by purchasing shares of ETFs that track silver prices, and finally through the stock of the individual silver companies/miners.

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.

Silver ETFs/CEFs Can Be Profitable

Although I recommend owning physical assets, one option every silver bull should consider, especially those who do not feel comfortable with purchasing physical silver, is through buying units of an ETF.

The iShares Silver Trust: This is a popular investment that seeks "to reflect the price of silver owned by the Trust, less the Trust's expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver." Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market. The fund has $8.9 billion in assets with an annual expense ratio of approximately 0.5%. One important thing to note with the SLV is that iShares recently announced an increase in fees. This increase makes SLV slightly less attractive than it once was. Although SLV tracks the price of silver, if silver were to remain stagnant for all of 2013, say at $25 an ounce, then SLV would lose value given the fees and expenses. Overall, it does a good job of tracking silver price moves in general, but this caveat is important to consider for a long-term investment. Shares in SLV currently trade at $21.72 on average volume of 11.7 million shares and have a 52-week range of $21.66-$34.08.

ETFS Silver Trust (SIVR): This is another less popular ETF that tracks the price of silver. SIVR is "an investment Trust. The Trust holds silver bullion and issues shares in exchange for deposits of silver and distributes silver in connection with the redemption of baskets. The investment objective of the Trust is for the shares to reflect the performance of the price of silver, less the Trust's expenses and liabilities. The Trust is designed to provide an individual owner in the shares an opportunity to participate in the silver market through an investment in securities." SIVR has about $600 million in assets, far less than the $8.8 billion in assets of SLV. In contrast, SIVR has an expense ratio of 0.3%, which is 20 basis points lower than the expense ratio of SLV. Over recent months, the performance of SLV has been superior to SIVR. SIVR currently trades at $22.16 on average volume of 280,000 shares with a 52-week range of $22.16-$34.85.

Sprott Physical Silver Trust (PSLV): The PSLV is an ETF that is backed entirely by physical silver bullion. The fund's goal is to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical bullion. The Trust offers a number of compelling advantages over traditional exchange-traded bullion funds, including bullion storage in Canada, which is not held with a bank-owned custodian. Further, the fund allows investors to redeem units of the ETF for delivery of an equivalent amount of physical bullion. In this regard, the fund is unique relative to SLV and SIVR. Currently PSLV trades at $8.76 a share on average daily volume of 1.2 million. The 52-week range of PSLV is $8.76 to $14.47.

ProShares Ultra Silver (AGQ): This ETF applies a 2X exposure leverage to silver using forward contracts and futures. The investment seeks "to provide daily investment results (before fees and expenses) that correspond to twice the daily performance of silver bullion as measured by the U.S. dollar fixing price for delivery in London. The fund invests in any one of or combinations of financial instruments (swap agreements, futures contracts, forward contracts and option contracts)." This is a play for short-term appreciation in silver prices. Like other daily funds of its nature, it should not be held for periods longer than a month in general. AGQ currently trades at $22.55 on average volume of 1.6 million. AGQ has a 52-week trading range of $22.53-$60.63.

Silver Companies

Finally there are the silver companies/miners to consider for exposure to silver. There are plenty of individual companies that I really like. See my other articles for which are my favorites and why. The best way to gain exposure to silver miners as a whole is through the Global X Silver Miners ETF (NYSEARCA:SIL). SIL currently trades at $13.04 on average daily volume of 182,000 shares. SIL has a 52-week range of $13.04 to $25.78. For those willing to take on more risk and do the necessary homework, an individual silver company or miner on my recommended list could be considered in place of SIL, which potentially could offer better returns. However, SIL will offer exposure to the whole sector.


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. Smartphones alone generate billions of dollars in silver demand, much of it 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.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own physical silver