Investors' 'Silver' Lining
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February’s CPI numbers weren’t good news.
The pace of price increases has fallen from the scorching levels of nearly 10 percent in 2022. But for the Federal Reserve, which is mandated by Congress to maintain inflation at a level of 2 percent (for no particular reason), its fall still isn’t good news.
Inflation has been hovering at nearly double the Fed’s target for the past nine months. More and more it’s looking like there’s little they can do to bring the pace of rising prices down. And consumers and investors have begun to take note.
The price of gold, long considered to be the quintessential hedge against inflation, has recently reached all-time highs of nearly $2,200 per ounce. But its precious metal cousin has lagged in the rally and may now be offering some value for astute investors …
The Rodney Dangerfield Metal?
Silver doesn’t get quite the same level of respect as gold does. And because it doesn’t command the same price levels as gold, it’s sometimes been called the “poor man’s gold.”
But it is indeed a hedge against both inflation and economic crises.
In the wake of the financial crisis of 2008, silver prices exploded to nearly $50 an ounce. And after the market backed off from that, it exploded back to $30 during the pandemic lockdowns. (Nearly tripling in value.)
But silver also has a demand aspect that gold does not. Aside from its renown as a store of value, the only other demand for gold comes from the jewelry industry. Silver, on the other hand, has a number of industrial applications.
According to the Silver Institute: “From electrical switches and solar panels to chemical-producing catalysts, silver is an essential component in many industries. Its unique properties make it nearly impossible to substitute, and its uses span a wide range of applications.”
Over the last 3-plus years, silver prices have again been trending lower — back into the $25 per ounce range. But they may not be here for long.
Because of its more diverse applications, there are more avenues of demand for it.
The Silver Institute is forecasting a boom in silver this year, anticipating demand reaching “1.2 billion ounces in 2024” — the second-highest level in recorded history.
And from a standpoint of basic economics (i.e. supply vs. demand) the price may be getting ready to see another breakout higher …
The silver market is forecast to remain in a deficit (total supply less demand) in 2024, marking the fourth consecutive year of a structural market deficit. Although this year’s deficit is expected to ease by 9 percent to 176 Moz (194 Moz in 2023), it will still be exceptionally high by historical standards.
It’s also important to remember that the silver market overall is smaller than the market of its yellow cousin. That means prices tend to move faster when an influx of buying hits the market.
And if a shortage of supply promises to make 2024 an exciting year for silver, there’s no shortage of investment opportunities to take advantage of it.
Investing Options Are Plenty
Taking advantage of breakout in silver can be done in any number of ways.
Obviously one of the surest ways is to own the metal outright in the form of coins or ingots/bars. You can take physical possession, but if you don’t have a place to store your valuables, metals dealers can actually warehouse your inventory for you.
Another path to profiting from silver would be to own shares of the companies that dig it out of the ground — silver miners. Mining companies’ earnings are inextricably linked to the price of the metal they mine, so if silver is about to break back out to the upside, mining shares should enjoy the good fortune, as well.
One caveat where miners go …
Remember, that silver can be a volatile market and a miner’s fortunes can fall just as fast as they rise, especially if a company is poorly managed or carries too much operating leverage. So doing your due diligence in this area is an absolute MUST.
Yet another investment avenue would be silver ETFs (exchange traded funds).
ETFs come in a couple flavors, with some investing in mining companies. Because they tend to hold a wide range of miners, ETFs can be a slightly safer bet than owning one or two companies on your own. Of course that swings both ways. If one of the ETF constituents hits it big, your upside will be damped somewhat because of the diversification.
Other ETFs hold silver directly. Funds like iShares Silver Trust track the price of silver very closely and can offer a good alternative investing opportunity.
But before you go thinking that ETFs are the perfect alternative, it’s important to remember there are management costs associated with them that you don’t deal with when it comes to physical silver or shares of individual companies.
Given the upside potential that appears to be building in silver, now might be a good time for metals investors to start assessing their options.
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