Silver may not be as scarce as gold but it has become much more attractive to investors. While silver prices recently soared to an 11-month high, silver continues to provide investors with more upside potential than gold.
Silver Prices Rising on Trojan Stock Market
After a record four consecutive years of declines, silver has been rewarding precious metal bulls in 2016. Silver prices have been on a tear in 2016, and recently hit an 11-month high. Currently changing hands at around $17.00 an ounce, silver prices are up 23% year-to-date.
Silver has turned bullish for two main reasons.
For starters, the admirable rebound on the stock market is not what it appears. Mesmerized by artificially low interest rates, investors are ignoring the earnings recession and sending stocks undeservedly higher. Eventually, investors will discover that they have been duped by a Trojan horse stock market masking weak fundamentals.
Second, the U.S. dollar remains weak and is down more than four percent against a basket of 10 currencies. Silver has an inverse relationship with the greenback. When the dollar is strong, investors shun precious metals. But when the dollar is weak, they turn their attention to silver as a hedge against uncertainty. Silver will continue to get support on global economic concerns and geopolitical tensions.
Silver Trends for 2016
What many investors tend to forget is that in addition to being used as a hedge against economic uncertainty and for jewelry, silver is an important industrial metal. In fact, the industrial use for silver accounts for half of the world’s annual silver demand.
Silver is used in medical technologies, nanotechnology, batteries, electronics, windows and glass, the automotive industry, and green technologies, such as solar energy and water purification. Before the financial crisis in 2008, silver was in huge demand as global manufacturing boomed.
In particular, silver is a major component in photovoltaics for solar energy. Each solar cell uses two-thirds of an ounce of silver. Today, solar accounts for more than 13% of total silver industrial demand. A decade ago, solar accounted for just 1.4% of demand. (Source: “Silver market supply and demand trends for 2016,” Northern Miner, February 2016.)
Demand for silver coins is also expected to be robust and should help drive silver prices higher. In 2015, a record 130 million ounces of silver coins were sold, accounting for 12% of physical demand. While silver prices have surged in 2016, silver is still significantly cheaper than gold—and more attractive as a safe haven investment.
Finally, demand for silver will come as production levels are projected to fall by as much as five percent from 2015 levels. This will represent the first reduction in global silver production since 2002. Low silver prices have given producers little incentive to expand operations. As a result, silver mine production is projected to decline through to 2019.
Silver a Better Bet than Gold
Silver may have underperformed gold over the last year with the gold-to-silver ratio hitting 83 at the beginning of March. This is the highest level since the global recession. But the recent rally in silver prices has leveled out the ratio to around 74 and shown silver to be a better bet.
Year-to-date, silver prices are up 23%. Gold prices, on the other hand, are up around 18%. As you can see, silver is now outperforming gold, as investors look for growth after gold retreated from its 13-month highs in March.
Chart courtesy of www.StockCharts.com
For all the above-mentioned reasons, silver will remain bullish in 2016. That doesn’t mean the rally in silver will avoid a bump or two and experience a short-term correction. Investor sentiment may be fickle, but the fundamentals supporting the 2016 run in silver prices are long-suffering.