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Between long-term fundamentals and near-term catalysts, these seven reasons to make a silver investment in 2019 could soon prove that the best time to buy is right now.
Market frenzy has come out of the prices for silver and precious metals over the last several years. Other investment indexes continue to set new highs and investor enthusiasm has rarely been higher. Any student of history could tell you that those facts alone mean smart investors should be positioning their assets in silver and other true measures of value.
As investor complacency for risk dwindles and borrowing on margin surges, long-term investors know that the party in stocks and other financial assets will not last forever. On a decline of more than two-thirds in the per ounce value of silver since 2011, seven catalysts are pointing to near-term and longer-term strength in one of the world’s most sought-after hard assets.
Several measures are acting to support current prices while others will have a longer affect. Many are already making stealth purchases before the rest of the market catches on to what could be another secular jump higher in prices.
Reason #1 to Make a Silver Investment in 2019 – Demand is Increasing
Unlike other precious metals that have limited demand outside of jewelry and investment, industrial applications for silver account for about 60% of global demand. That means, as the global economy grows, so does demand for silver. While the digital age has decreased the demand for silver in photography, it still accounts for just over 5% of total demand.
Even on shrinking demand for silver in photography, consulting firm CRU forecasts demand for the metal is to increase by 27% over the four years to 2018. The 142 million ounce increase in industrial demand will be led by a 4.4% annual increase in photovoltaic solar panels and 4.9% annual growth in the automotive industry, both large users of silver.
More than a quarter (28%) of industrial demand for silver went to Photovoltaic panels in 2013. As solar cell technology becomes more affordable as a renewable energy source, PV panel demand for silver could increase at a much faster rate and draw a considerable amount off the market.
Demand from investors and Silver exchange traded funds is really the wild card. While demand for silver in industrial applications and even for jewelry is relatively easy to forecast, investors can jump into the market and send the price soaring. Even against continuous liquidations in the Gold ETF over the last several years, the Silver funds have seen solid demand and ETF holdings should rise by about 15 million ounces this year.
Lower prices last year sparked a volatile bounce in demand by funds with the six largest silver-backed ETFs increasing their holdings by 104 tons to a record 17,135 tons in a single day in September. Total demand for silver is expected to reach 1,036 billion ounces this year with the potential to go much higher on a return to investor sentiment.
Reason #2 to Make a Silver Investment in 2019 – Inflation is Coming!
To hear economists and market pundits talk, global inflation is dead and deflation is the only economic bogeyman worth mentioning. The annual increase in prices has slowed to 0.9% in the United States and basically zero in the eurozone over the year to April 2015.
But the market would be wise to watch history and the ability of inflation to jump without so much as a clue beforehand. It was only three years ago that annual inflation doubled to 3% in 2012 from the prior year and the five-year average before the financial crisis was above three percent.
Against the singular mindset that inflation will never be a problem, the monetary authorities are pumping historic amounts of money into their financial systems. The U.S. Federal Reserve has mostly stopped its monetary program, after increasing money in the system by nearly 400% over the five years through 2014, but Japan and Europe are just getting started on their programs.
The European Central Bank has committed to pumping more than $1 trillion into its financial system over the next 18 months to September 2017. It will do this by purchasing sovereign bonds and corporate debt, driving yields further to historic lows.
The focus on monetary easing could have disastrous consequences. The Swiss government recently became the first country ever to issue ten-year bonds at a negative interest rate. Investors are actually paying the Swiss government to hold their money over the next decade for a guaranteed loss on the investment. The cost of debt, its yield, has disconnected with reality and the cost of borrowing money has lost all meaning for governments and investment-grade corporations.
When large institutions and corporations can borrow money at almost no cost, they will and they will do so until there is so much fiat money in the system that inflation returns with a vengeance. When this happens, only true stores of value like hard assets will offer protection.
Reason #3 to Make a Silver Investment in 2019 – Supply could be about to Fall
The record plunge in metal prices in 2011 caused a snap decision at mining companies to drastically cut capital investment. A bleeding cash position needed to be protected to keep miners afloat so spending on mine development was cut to the bone.
This is typical in the commodity cycle as miners spend billions to ramp up production as prices are booming only to move the market into an oversupplied condition that causes prices to plunge. As prices plummet, management panics and cuts spending to protect the company, leading to an eventual production deficit. And the cycle begins anew.
HSBC is forecasting a decrease in mine supply, both primary and by-product, through 2015 as low prices discourage scrap recycling. The bank notes that government sales seem to have ceased altogether as governments have sold out of their reserves over the last several years to make up for the deficit in production. The bank has a price target of $20.50 through the end of the year with a range forecast of $15.25 to $21.25 per ounce.
Even as silver prices increase, it may take several years production to increase to meet demand. According to the 2014 World Silver Survey, 71% of global silver production comes as a by-product of mining copper (20%), gold (13%) and lead & zinc (38%). This means that even as demand for silver increases and the annual production deficit jumps, mining production may not increase significantly if prices for other metals do not increase. If gold prices remain depressed, gold miners will have little incentive to increase production and the supply of silver mined as a by-product will be limited.
Not only are long-term fundamentals positive for decreased silver production, but the metal is prone to geo-political risks as well. The chart below graphs the top 15 silver-producing countries, seven of which are considered high-risk for labor stoppages or other political risks.
These 15 countries supply 93% of the world’s mined silver, with the top five accounting for 62% of production. Many of the producers are net importers; for example, the United States only produces 35% of its annual silver demand.
Russia has seen its economy toppled by sanctions and the drop in oil prices, while Mexico continues to struggle against corruption and drug cartels. A disruption in just these two producers could take up to 25% of annual silver production off the table.
Governments have managed the annual production deficit in silver over the last decade through sales of reserves. Through 2014, government reserves have nearly been exhausted and net sales have ceased to add to supply.
Reason #4 to Make a Silver Investment in 2019 – Safety from the Coming Crash in Stocks
The graph below overlays the value of the S&P 500 index on the balance sheet of the Federal Reserve over the six years to March 2015. The Fed increases its balance sheet through monetary programs, discussed earlier, by buying bonds with money printed by the Treasury Department.
It doesn’t take Warren Buffet to see what is going on in the markets. Pumping more money into the financial system has lowered rates, causing investors to seek higher yields in stocks and other risky investments. Each time the Federal Reserve ended a monetary program, the market stagnated until a new printing scheme was developed. The Fed ended its final program in late 2014 and is now talking about raising interest rates, something it hasn’t done since June 2006.
As if a 200% increase in the S&P 500 over the last six years was not indication enough of overheated asset prices, take a look at three other global markets in the graphic below. The Japanese Nikkei index and European Stoxx 600 have risen fairly steadily over the period. The Shanghai composite fell on weaker Chinese economic growth, but has more than doubled over the last year.
What happens when the Federal Reserve decides to take the punch bowl away from the party? While monetary programs are still pumping money in Japan and Europe, a drop in the U.S. market may have a contagion effect on the rest of the group. Governments will resort to even more monetary programs, powerless to support investor sentiment, and the next crisis will commence.
When financial markets collapse and indirect assets lose value, investors rush to the safety of hard assets and real stores of value. Prices for precious metals could surge as they did after 2009.
Reason #5 to Make a Silver Investment in 2019 – Long-term Returns are Attractive
A look at a chart of silver prices shows just how volatile the investment has been over the last decade. As the price of gold lost a third of its value since 2011, silver prices have fallen faster and have erased two-thirds of its value.
But long-term fundamentals for the metal have won out over short-term market hysteria. Even after the plunge in the price of silver, investment in the metal has yielded a compound annual return of 8.2% since 2000, well over the 2.7% annualized return provided by stocks in the S&P 500.
These long-term fundamentals, like increasing demand and limited production, will continue to support prices and long-term returns look attractive. Applying a trend-line to the price of silver from the beginning of the millennium should support the price to $25 per ounce, more than 50% above the current level. Even if near-term factors fail to push silver higher and it takes three years to reach this long-term trend level, investors will realize a compound annual return of nearly 15 percent.
Reason #6 to Make a Silver Investment in 2019 – Gold/Silver Ratio Hints at Imbalance
The price for silver is often analyzed relative to the price of gold; in more basic terms, the amount of silver it takes to buy one ounce of gold. With the price of gold around $1,317 per ounce and silver just above $16.97 per ounce, the gold-silver ratio is at seventy-seven.
Prior to 1900, many countries issued gold and silver coins and enforced limitations on the level at which the ratio moved. The U.S. Geological Survey estimates 17.5 times the amount of silver in the ground relative to gold, so there is some fundamental basis for the ratio.
While the ratio has risen steadily since the 1970s, it has averaged around 60 times over the last couple of decades. The faster decline in the price of silver since 2011 relative to gold prices has increased the ratio significantly and it is close to the point where it has broken lower in the past. Since gold has found a strong bottom above $1,100 per ounce, a decrease in the ratio would likely have to come from an increase in the price of silver.
Why is the gold-silver ratio important? Besides being a trading signal used by commodities investors and other market participants, it helps to measure the relative attractiveness of the two metals. While gold may be a good investment in many of the upside scenarios for silver, such as increasing inflation, it is currently very expensive relative to its peer metal.
Reason #7 to Make a Silver Investment in 2019 – Technical Strength to the Upside
Besides the strong, longer-term fundamental reasons to make a silver investment, the commodity is showing technical signs of a rally that could lead to excellent short-term gains.
The price of silver recently broke higher through the bottom band of its simple moving average envelope and made a quick move to upper resistance. The steep sell-off over the last six months of 2014 appears to have established a bottom in prices. Prices should find strong support between $15.50 and $16.00 per ounce. Silver may meet some resistance breaking above the $17 per ounce level in the near-term but fundamentals should help it break out and move higher long-term.
The 14-day stochastic relative strength indicator (RSI) has recently moved from an overbought condition, signaling a good opportunity for new investors. The RSI measures the current pricing strength against its high-low over a set period of time. If the price falls to the lower band in which it has been trading, it should be supported higher unless new information influences fundamentals. On a technical basis, the RSI is flashing neither a strong buy nor sell signal but presents a good opportunity to start dollar-cost averaging.
How to Buy Silver
While short-term profit potential exists, the smart money is buying silver for long-term protection and growth. This can be done through exchange traded funds, but these investments are subject to risk in the financial system and record-keeping. Most investors have sought safety and protection through a portion of their investment in physical possession.
Physical investment in silver can come in the form of bullion products like bars, rounds and legal-tender coins. Coins are often preferred since they are easy to transport and less expensive per unit that larger bullion bars. Among coins, the Morgan Silver dollar is the most popular investment since before the 20th century. Beyond physical possession, precious metals can be held in a custodian account at approved and insured depository trustees.
Knowing from whom to buy precious metals is just as important as how you buy. Brokers and custodians must be carefully vetted before buying and storage. Many overnight shops have appeared over the last several years to take advantage of investor complacency and misinformation.
The Certified Gold Exchange has built a reputation as the market leader in silver and other precious metals over more than two decades of service. An A+ rating by the Better Business Bureau is a testament to its level of quality customer satisfaction and fair dealing. Account representatives are specialists in their specific metal and non-commissioned, so you know your satisfaction is their only agenda.
Beyond the popular Morgan Silver dollar, Certified Gold Exchange also offers the American Eagle Silver and Peace Silver dollars, the Silver Canadian Maple Leaf and the Sunshine Minting Silver Round. Call a certified account representative at (800) 300-0715 or by clicking through to How to Buy.
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