Solar Power To Drive Silver Higher

|
Includes: AGQ, DBS, DSLV, DULL, PSLV, SHNY, SIVR, SLV, SLVO, USLV, USV, ZSL
by: Power Hedge
Summary

Silver has had disappointing performance over the past year, remaining range-bound.

This disappointing performance came despite the metal having strong fundamentals that should have driven the price higher.

The growing demand for renewables could be the thing that drives silver prices higher.

The manufacture of photovoltaic cells will cause silver demand to surge as solar becomes a larger portion of the world's energy mix.

This huge shift in demand will ultimately force prices higher, regardless of what happens in the futures market.

Over the past few years, investors in silver (SLV) have been widely disappointed as the metal has failed to break out of its range-based condition. This is even in spite of the fact that several of the major bullion banks have been charged with manipulating the market and pledged to stop those activities. We have also seen a recovery in the price of oil and even inflation has started to trend upward. It is undoubtedly frustrating to investors that all of these developments that would ordinarily have a positive influence on the price of the metal have not managed to push up the price. There is however one upcoming event that might. This is the fact that solar power is likely to become a larger portion of the world's energy mix in the coming years.

As mentioned in the introduction, the price of silver has been range-bound for the past few years. As we can see here, the price of the metal has remained in the $16-$18 range over much of the past year and has declined over much of the past month:

Source: Kitco

The largest silver ETF, the iShares Silver Trust ETF, has not performed much better, trading at prices between $15 and $17 over much of the past year:

Source: Fidelity Investments

Silver is oftentimes bought by investors as a form of "gold-light." In short, the same fundamentals that are considered positive for gold are considered to be positive for silver. These include:

  1. Protection against inflation. Inflation by definition is the value of the U.S. dollar (or other currency) declining against the value of the goods and services provided by the economy. Gold and silver are generally considered to maintain their purchasing power in such an environment however. The U.S. inflation rate has increased this year, going from 2.1% in January to 2.9% in June.
  2. Protection against geopolitical uncertainty. It is difficult to argue that geopolitical uncertainty has been increasing recently. During such times, precious metals have historically outperformed other assets.
  3. Protection against a declining dollar. For some reason, the U.S. dollar has increased in value recently against other currencies despite the United States facing the prospect of trillion-dollar deficits into perpetuity. However, the increasing inflation rate in the United States tells us that the U.S. dollar is merely losing value more slowly than other currencies.

All of these factors should be pushing the price of gold and silver up but thus far they have not been. However, one thing that is quite likely to prove positive for silver at least over the coming years is the fact that silver is not only a precious metal store of value but also an industrial metal.

Silver sees use in a variety of industries in the United States alone and in fact its use as a precious metal in investment makes up less than half of its total usage:

Source: Geology.com, United States Geological Survey

As shown here, the largest use of silver is in the electrical field where it is often utilized in the form of silver paste. This is a highly conductive compound used in switches, defrosters in automobiles, capacitors, and RFID tags. It is also used in the manufacture of cellular telephones, table computers, and laptops. It is also used to construct solar panels as silver paste printed onto photovoltaic cells is what captures and carries the electrical current that is generated by the sun's light impacting the semiconducting layer of the cell. Another use of silver is to reflect solar energy into collectors that use salts to generate electricity. This use of silver in solar energy is likely to cause silver demand to surge going forward, which should cause the price to climb upward.

This is due to the enormous amount of silver used in the manufacture of photovoltaic cells compared to that of other uses. According to Casey Research, it requires approximately 200-300 milligrams of silver to construct a cellular telephone. It requires somewhat more silver, 750 milligrams-1.25 grams, to construct a laptop computer. It requires approximately twenty grams of silver to construct a single photovoltaic cell. Thus, the solar power industry requires far more silver than today's industries if it achieves any sort of scale.

Analysts at the U.S. Energy Information Administration expect this to be the case. As I discussed in a recent article, the agency expects natural gas and renewables to grow in usage between now and 2050 while all other sources of power will remain static or decline in use:

Source: Annual Energy Outlook 2018, U.S. Energy Information Administration

Of this expected growth in renewables, approximately 64% is expected to come from wind and solar. Obviously, in order to meet these expectations, a large number of solar panels will need to be constructed, which will cause silver demand from industry to surge.

In the past, I have lamented the fact that the economic law of supply and demand does not appear to fully apply to gold and silver due to the influence that the futures market has in determining silver prices. However, should the growing demand for silver from the solar market continue to play out, it may cause a supply shortage which will ultimately cause the price of physical silver to surge regardless of what happens in the futures market. For this reason, it is always recommended for investors to hold their silver in physical form as opposed to holding paper contracts.

In conclusion, silver has been a disappointing asset to hold over the past few years due to its range-bound price. It does look like the demand for renewable energy going forward could change this however as the manufacture of sufficient solar panels to meet the demands of this emerging sector will cause the demand for physical silver to grow to the extent where the price is forced upward. Overall, silver could be an interesting and profitable way to play the renewable energy sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.