Volatile Silver’s Pros and Cons
Most precious metals commentaries tend to focus on gold, but while gold’s price progress over the past few years has been relatively slow and steady – as is its wont – its more industrial related siblings, perhaps with the exception so far of platinum, have been rather more volatile. This has also meant there have been bigger price gains for these overall, but interspersed also with some major dips.
In this analysis we’ll look at silver – sometimes known by traders as the devil’s metal because of its occasional vicious price swings, both up and down - which can make it particularly risky. Although its principal usage nowadays is very much in the industrial sector, and rising – mainly in photovoltaic, electronic and medical applications, coupled with continuing demand in the jewelry sector, it is also the precious metal that is most heavily influenced by swings in the gold price because of its historic function alongside gold as a principal monetary metal. Even though this usage has pretty much fallen away it remains the precious metal most directly affected by price movements in association with those of its yellow sibling. Indeed in general its price tends to follow gold’s path, but in a more exaggerated manner. When gold moves up in price silver tends to do so too, but with a likelihood of greater percentage gains. Conversely if the gold price dips, then silver tends to fall back faster in percentage terms.
But to add to its potential volatility, silver has some almost fanatical support. This saw it surge to close to $50 an ounce as recently as 2011 in the last big silver squeeze, before the apparent bubble burst and it was brought back down to around $12 an ounce as recently as March last year. It is currently trading at over $26 an ounce after a short lived surge to $30 in the aftermath of the GameStop equities run right at the beginning of the current month – thus further demonstrating its volatility in comparison with the other precious metals.
Silver has its strong proponents and equally strong detractors, particularly as there seems to be a huge amount of disagreement over its basic supply/demand fundamentals. This is largely because there is massive controversy as to how the enormous amount of above-ground silver owned by a wide variety of people, which could conceivably be brought into play should there be a huge spike in price, should be treated. This overhang, which largely takes the form of silver cutlery, silver artifacts, and jewelry, could be melted down as scrap supply and provides something of a potential cap on the price as far as some more bearish analyses are concerned. However new industrial demand is on the up and its rise in usage does not seem likely to slow down year-on-year giving the continuing growth in the industrial sectors which currently consume it and this currently seems to be the prime silver price driver, along with a seeming shortage of availability of silver bullion in coin and bar form.
Time was when silver’s big industrial usage was in photography, which is still an important sector for it, but perhaps minuscule in comparison with its heyday given that it has largely been replaced in day-to-day photography with digital imagery requiring no silver at all. But overall new silver usage seems to be centered in major potential growth sectors of the global economy and in terms of consumption in comparison with new mined production the metal appears to be in something of a supply deficit, although given the big inventory overhang this won’t necessarily have quite such a big impact on price as it might for other commodities. However, it would probably take a very big rise in the silver price to unleash any serious move towards the melting down of privately held silver in the form in which it is held, sufficient to seriously impact the current supply/demand equation.
For the silver purchaser, it should be noted that the metal has more than doubled in price since its March 2020 low point. It appears to be in a technical supply squeeze at the moment which is perhaps why its price seems more resilient than most of the other precious metals – it is price positive so far this year at the time of writing. In part this will be because of the massive rise in the big silver-backed ETFs which has left them undoubtedly short of the amounts of silver bullion necessary to meet their commitments. This may take time to correct and will thus help maintain positive price pressure for the physical metal in the short term at least.
Thus, in some commentators’ eyes, silver almost certainly remains on track to exceed $30 an ounce in the current year. It may also over time prove to be responsible for dragging gold up with it – the tail wagging the dog – so we do view precious metals in a positive light for the year ahead. Silver, given its potentially positive environmental benefits in its usage in the solar panel sector, will also be helped by a more positive attitude towards climate change alleviation by the new Biden administration. Demand will be aided too by the switch to 5G updates in the cell phone sector. Cell phones all use silver in their electronics, albeit in tiny amounts, but the huge unit volumes involved makes this a significant use in total. But buyer beware! Silver has a history of disappointing holders, but this time may be different but don’t necessarily count on it given its ‘devil’s metal’ reputation.
by Lawrence Williams
Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.
The opinions expressed in this article are the author's own, do not necessarily reflect the opinions or views of Rosland Capital LLC or its employees, and do not constitute financial or investment advice or recommendations from the author or Rosland Capital or its employees. The author is compensated by Rosland Capital for his articles.