Silver has been on a great uptrend, and as inflation fears continue to loom, the dollar remains relatively volatile and political unrest prevails around the world, the precious metal will likely continue to witness price appreciation.
As a whole, both macroeconomic and microeconomic forces are favorable for silver. From a macroeconomic perspective, the increases in money supply over the past few years to support the U.S. economy and boost artificial demand are expected to lead to increased prices, making inflation inevitable. Additionally, the U.S. government is running a budget deficit of more than $1 trillion per year and has been borrowing to fund this spending spree. This monetizing of debt is more likely than not to support inflation, which will further lead to a reduction in the purchasing power of money, or dollars.
From a microeconomic standpoint, there is likely to be an imbalance in supply and demand of silver in the near term providing positive price support to the precious metal. Demand for silver is expected to significantly increase driven by its heavy industrial uses, a hedge against macroeconomic forces like inflation, and its relative valuation when compared to its sister metal, gold.
On the industrial forefront, silver has unique properties including strength, sensitivity to light, malleability and ductility, electrical and thermal conductivity, reflectivity and the ability to endure extreme temperature changes. As a result, it is commonly used in the electronics space and can be found in plasma display panels and printed circuit boards, as well as in the lining of refrigerators, for food storage containers, and for water purification. Additionally, the metal can be used in the medical sector as an antimicrobial to fight bacteria and as an antiseptic to treat fungal infections. As economies in the developing parts of the world continue to expand and the purchasing power of individuals in these nations rise, demand for products that utilize silver will likely follow.
Silver's industrial uses further span to the solar energy industry, as that silver paste is used in 90 percent of all crystalline silicon photovoltaic cells, which are the most common type of solar cells. Additionally, silver is used in another way to generate electricity by reflecting and concentrating solar energy onto collectors containing salts which are used to run generators. Furthermore, as nations around the world continue to seek cleaner energy standards the demand for solar energy will likely increase. In fact, the demand for solar energy has grown at nearly 30 percent per year over the past 15 years and is expected to sustain this growth in the near future.
On the supply side, it appears that a shortage in silver is on the horizon. In fact, the total annual world consumption of silver is greater than mine production and has been for nearly twenty years. As a result, inventories of the metal held by governments have started to dwindle away. Furthermore, a study conducted by the United States Geological Survey, indicates that silver is nearly twice as rare as gold in the long term because it's not recycled at the same rates as gold and at current consumption rates all of the silver that's in the Earth's crust will diminish away in the next decade.
Further supply woes could potentially form from the fact that roughly 30-35 percent of global silver is produced through pure silver mines while the rest is produced through electrolytic copper refining, gold, nickel and zinc refining. As a result, a significant amount of silver cannot be produced without disruption to other mining activities leading to the overproduction in other metals, making silver supply from mining relatively inelastic and insensitive to price changes.
The last force that is boosting appeal of silver is its relative value, in historical terms, as compared to gold. Silver is cheap compared to gold. The current gold:silver ratio is about 37:1, significantly higher than the long-term ratio of 16:1, indicating that silver has tremendous upside potential.
As for inflation, historically speaking, gold has been the “go to” precious metal when it comes to a long-term hedge against rising prices; however, silver provides a similar protection mechanism enabling investors to safeguard their wealth in addition to the flexibility and multiple uses that is carries, making it a top choice.
Some ways to capitalize on silver's shine include:
- iShares Silver Trust (NYSEARCA:SLV)
- PowerShares DB Silver Fund (NYSEARCA:DBS)
- UBS E-TRACS CMCI Silver TR ETN (NYSEARCA:USV)
- ETFS Physical Silver Shares (NYSEARCA:SIVR)
- Global X Silver Miners ETF (NYSEARCA:SIL)
Disclosure: Long SLV and SIL