In this article, we are covering the merits of investing in Silver. Will it be a great investment going forward? And will it revisit its peak of $50 established in April 2011?
We touched on Silver as one of the first few articles on this website in March 2021. After the article, it has been range bound between $18-$25. In recent times the price action looks great for a potential breakthrough of their key resistance at $30,
Hence, we decided to revisit our thesis and see if everything still firmed up nicely.
Technical Analysis of Silver
Source: TradingView
The peak of Silver at close to $50 was established during the Hunt Brothers’ short squeeze in 1980 and 2011. The price of silver is still far off the peak and Gold has already broken its all-time high- trading at around $2400 now.
Source: TradingView
Zooming in on the charts, this is the fourth time that Silver has tested the $30 mark since 2020. We could see volume has been higher over the past year as compared to the other periods. This could be a sign of accumulation.
So realistically, if there is a convincing break above $30, Silver at $50 as a target over the medium term would not be far-fetched.
We will be looking at the fundamental aspects to see if it could support such a move.
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Silver Supply and Demand
Source: silverinstitute.org
Based on the table above, demand has consistently exceeded supply from 2021 to 2023. Industrial use of Silver has also been progressively increasing through the years.
Extracted from our earlier article;
“More than half of the 1 billion ounces per year are set aside for industrial use. Silver is used in many sunrise sectors such as solar, electric vehicles, medical, dentistry and others. The demand for industrial use would only accelerate in the future based on the uprising sectors such as solar and electrical vehicles.”
From our observations, electrical vehicles are here to stay as public car parks in Singapore are now fitted with charging stations with several parking lots allocated for such purposes.
Net physical investments have also been gradually increasing. With silver in the doldrums over the past few years, it is not surprising that there has been a net investment outflow in Exchange Traded Products.
This is usually the proxy where retail investors will invest in Silver. Therefore, if Silver starts to perform, we are confident the net inflows to the exchange-traded products will lead to a greater deficit from the supply and demand perspective.
Fiat Money
Source: Tradingeconomics
The US government debt level is scaling new highs like inflation. The way we see it, the new president (Trump or Biden) should still be ramping up the debt level. There is no indication from their agenda, that the reduction of government debt is of top priority. The current debt is at 34.6 trillion dollars.
As long as there are investors in the US debt, then the sky is the limit till the musical chair game stops.
Currently, the foreign holdings of Treasuries stand at 8 trillion dollars with Japan being the top foreign investor with 1.15 trillion worth of US Treasuries.
It is worth noting that China has been reducing their holdings despite the higher interest rate offered by the US Treasuries. China has been holding consistently above 1 trillion dollars up till 2022. Currently, their holdings are just slightly below 800 million dollars.
Their capital allocation from Treasuries is likely towards Gold as the Central Bank of China has increased their Gold reserves from 1.95k tonnes to 2.26k tonnes since 2022.
Source: Statista
There has been some reprieve from the money printing press as we speak. We could see from the chart of the Federal Reserve Balance Sheet that assets (mainly in Treasuries) have fallen from 9 trillion to slightly below 8 trillion.
The figure is still mind-blowing as there was a surge from 4 trillion dollars in 2020. It signifies the Fed is the anchor investor of the Treasuries, which could lead to a dent in investor confidence in Treasuries and the US economy.
The fact that the Fed can sell off the Treasuries through the reduction in their balance sheet in recent years, shows there is demand from the market especially with a coupon rate of above 5%.
However, with interest rates above 5% (high financing charges), coupled with the consistent government budget deficit, hiving off their humongous debt remains a challenge. As long as there are willing buyers of the ever-increasing supply of Treasuries, the music will go on.
Treasuries would not default, as it is denominated in USD. If there is lacklustre demand for Treasuries, to meet their obligations, the US could simply print more money to get themselves out of trouble.
However, the US dollar is likely going to devalue when it is of a huge magnitude, as the dynamics of supply and demand for their currency come into play.
China is already doing what is rational by diverting its reserves from Treasuries to Gold. We are not sure of the game plan of the Japanese but they have been ardent supporters of the Treasuries to date.
So in an upheaval of the financial markets when the music stops, gold and silver should do well given their finite supply.
Gold Silver Ratio
Source: MacroTrends
The current Gold Silver Ratio is at 86Â which is near the higher end of the range for the past 100 years. The two spikes in this ratio have been in 1990 (100 level) and 2020 (113 level).Â
If this ratio reaches around 90, this could be an optimal ratio to consider for an investment in Silver notwithstanding any anomaly spikes.
At this current ratio, everything else is constant, Silver seems to be at the value zone relative to the Gold prices.
Institution Manipulation of Silver
JP Morgan is a big player in the silver market. JP Morgan was fined 920 million dollars in 2020 for manipulating the Gold and Silver market.
Two of their traders were also convicted and jailed in 2023.
With these settlements and legal cases, institutional involvement in trying to manipulate and keep the prices within a range could be out of the window for now.
So if real demand and euphoria come into play, it would be interesting to see how Silver will perform.
Summing Up
Silver has been lacklustre over the past few years. It is still almost 45% off its all-time high of $50.
Given the market dynamics, we believe that a convincing break of $30 for Silver could see it scale to greater heights with $50 in sight.
There have been consistent supply deficits, and this is not yet factoring in the potential investment demand from exchange-traded products.
With Treasuries still holding well but the US debt level scaling like there is no limit, we could potentially see a devaluation of the US Dollar should demand for Treasuries dissipate. This would favour safe-haven and inflation-fighting instruments such as gold, silver and commodities.
Also, Gold has been setting new record highs, silver is still lagging. With this tailwind, it could see a price surge as silver has both industrial and investment merits.
Therefore, we are positive about the prospect of Silver in the near to medium term. A break of $30 would be a good catalyst from the charting perspective.
For a proxy for investment in Silver, you could look at the Silver ETF (SLV) or Silver Miners ETF ( SLVP or SIL).
Read Also: Silver to the Moon?Â
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Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment. It is not a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
