Investing in Silver and Silver Mining Funds
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Key takeaways:
- Silver has both industrial and monetary attributes and is indispensable for new technology.
- Silver is a great portfolio diversifier because of its low correlation with the broad stock market.
- Similar to gold, silver is considered a safe haven investment in uncertain times acting as a hedge against inflation.
- Investing in silver mining companies gives a leveraged bet on the price of silver while also benefiting from dividends paid by the mining companies.
- The supply and demand for silver are both increasing rapidly.
Invest in silver today through AuAg
ETCs, physical silver, silver funds (& ETFs), derivatives, shares - there’s multiple ways to go about investing in silver. However, there is a great disparity between physical and paper silver where the paper silver market is several hundred times bigger than the physical silver market; this is however, of course subject to change. Very few choose to invest in physical silver, for example bars and coins, due to its lack of liquidity and logistical challenges (storing and transporting). The easier, cheaper, and safer option are silver investment funds.
Explore our sector fund ─ AuAg Silver Bullet ─ with an emphasis on investing in silver mining companies; a great option for someone looking to add silver investments to the portfolio. AuAg Silver Bullet consists of some of the most sustainable silver mining companies in the industry chosen based on their ESG risk rating from Sustainalytics.
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The advantages of investing in commodities
Commodities have always been considered a great way to diversify your portfolio. This is due to the fact that it is an asset class with low correlation with the broad stock market. Investing in commodities such as silver, gold, or any other precious metal provides several advantages to an investor’s portfolio:
- Risk-adjusted return: An investment portfolio with several uncorrelated assets typically offers a higher risk-adjusted return.
- Protection against inflation: Investing in commodities can be a good protection against inflation as commodity prices have historically increased during periods of high inflation.
Investing in physical commodities is however not a good fit for everyone. Investors in businesses have multiple ways to win, and that is why many prefer investing in businesses over physical commodities. In the end, a business may expand and grow its profits, leading to the stock price being pushed. In comparison, a commodity does not generate any cash flow; the only reason it would increase is because someone wants to pay more for it.
About silver
By investing in silver, the investor gains exposure to a metal with both industrial and monetary properties. Silver [Ag] is a precious metal with high resistance to corrosion and oxidation and has the best thermal and electrical conductivity of all metals, which makes it indispensable in our high-tech and green world. It also has antibacterial properties that make it useful in medicine, water purification and other consumer products. It is a unique metal as it is important for both industry and used as money. There are no spare stocks of silver today, which can result in a physical shortage and price increase. Silver is often just a by-product for the largest mining companies (only about 27% come from primary silver mines), which can provide the conditions for a perfect location for focused silver mining companies.
The price of silver tends to rise in times of inflation and a weaker US dollar and has a low correlation with the stock market. Thus, silver contributes to risk diversification in a traditional portfolio of equities and fixed income assets. The price of silver also tends to rise in times of market turmoil, similar to gold, in times when risk aversion in the market is high. Silver investments have historically proven an efficient way to protect a traditional portfolio of stocks and bonds.
A silver investment plan is useful for every long-term investor to consider in order to get the highest risk adjusted returns from a multi-asset portfolio. To invest in silver is an opportunity to participate in an investment that provides interesting opportunities in a world transitioning to a more sustainable future.
How and where is silver used?
Silver is most commonly associated with luxury goods such as jewellery, tableware, and fine art. However, a majority (~55%) of silver today is used as an industrial commodity. It is used extensively in a wide variety of fast-growing electronics segments such as solar panels, LED lighting, flexible displays, touch screens, cellular technology, and water purification.
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Is silver a good investment?
Silver is a good investment for many of the same reasons for why gold and other precious metals are liked by investors:
- Returns: During certain periods, silver has outperformed greatly, providing a high return.
- A store of value: Similarly to gold, silver can hold its value and even gain over time.
- Liquidity: The silver market is fairly liquid.
- Diversification: Silver is a good risk diversifier since it has low correlation with the broad stock market.
When to invest in silver
The price of silver is fairly volatile because the market is so small. As with any investment, the timing when to buy is highly dependent on the current market and the investment objectives. It is close to impossible to time the market, especially so for silver. As such, investors should preferably set up a monthly recurring investment with a flat-rate amount. Going all in at once is a very risky way to invest in silver due to its volatility.
Based on our experience, we believe investors should consider investing in silver in the following scenarios:
- An attractively priced company becomes available that is ramping up their production or can take advantage of rising silver prices
- You need a reliable hedge against inflation
- You want to hedge your portfolio
- You want to expand your portfolio into commodities
- You want exposure to a commodity that is indispensable in the transformation to a green world.
Investing in silver mining funds
There isn’t necessarily a “best way” to invest in silver. This all depends on the current market, your own financial situation, and what you want to achieve with your investment. There are pro’s and con’s with investing in physical silver. An investor completely removes the counterparty risk by holding physical metal, but at the same time you have to sort out storage and safekeeping yourself. However, if you seek an easy and instant investment of silver, silver mining funds are usually your best option.
Because of their unique makeup, silver funds focused on mining companies are viable investments for pretty much everyone, delivering several benefits to all types of investors including:
- Portfolio diversification: Silver mining companies' low long-term correlation with the broad stock market contributes to a higher risk-adjusted return in a portfolio that largely consists of equities and interest rates. This makes them a valuable source of diversification in your portfolio.
- Commodity exposure through equity: Silver mining companies (equity) are strongly correlated to the spot price of silver. This gives investors exposure towards the commodity itself without having to buy physical metals, or a paper derivative. .
- Protection against inflation: The price of silver has, similarly to gold, an inverse relationship to the amount of money that is created.This will over time provide an investor with a protection against inflation.
- Financial growth: Investors can increase their exposure to commodities by investing in equity silver mining company funds. This brings the benefits of dividends paid by the mining companies and operational excellence as the silver mining companies’ stocks do not only rise from silver’s appreciation, but also through the exploration and development of mines.
- Leveraged bet on silver prices: Investing in silver mining companies gives investors a leveraged bet on the price of silver - which you don’t get if you buy the metal itself. The share price of silver mining companies tend to increase more than the price of silver when the silver price is on the rise, and vice versa.
Comparison between silver and gold
Silver is sometimes referred to as the “poor man’s gold”, however, it is anything but a cheap gold proxy. It is a more volatile precious metal than gold because the silver market is smaller and that it can be used as both an investment and an industrial metal.
Similarly to gold, investing in silver can be viewed as a safe-haven investment because it is a hard asset and a store of value. And just like gold, it can be viewed as a hedge against inflation. While silver may always sit in the shadow of gold, silver investment funds can give investors time periods of major outperformance. There are two important differences between silver and gold: the industrial usage of silver and their relative market sizes.
- Industrial usage of silver accounts for ~55% of its annual demand. In comparison, gold only has ~8-9% of its demand driven by industrial use; the rest is used for jewellery and gold bars. Gold is in other words regarded as a more purely precious metal, whereas the price for silver is impacted by both the demand for it as a precious metal and its industrial demand.
- The global gold market is the biggest precious metal market by a large margin. It is around three times as large as the global silver market.
The gold-to-silver ratio
The “gold-to-silver ratio” is a commonly cited figure that represents the amount of silver required to purchase one ounce of gold. The ratio shows the prices relative to each other, and can indicate when one is either cheaper or more expensive than usual. In the modern era, the average price ratio between the two stands at around 55:1. In 2020, during the Covid-19 pandemic, it reached a new peak of 123.34:1, as investors likely invested in gold as a safe haven.
How to invest in silver – silver funds, shares, ETCs
Physical silver
You can buy the physical metal and store it at home, or in another safe place. ETCs for those who want to supplement their portfolio with a straight 1:1 exposure to silver, it is the cheapest/easiest to use the ETPs [ETCs] available to buy at most platforms where you can buy stocks and funds. Make sure the products have allocated physical gold and no counterparty risk. An ETC is also constructed via an SPV whose assets are entirely separate from the issuer's assets.
ETCs (Exchange Traded Commodities)
By buying an ETC, you own physical silver, but you do not have to take care of the storage yourself.
Derivatives
Investment products that follow the price of silver, but where you have a counterparty risk against the issuer of the product.
Shares
The share price of the mining companies that extract silver is strongly linked to the spot price for silver. Mining company shares often move more than the price of the underlying asset because you also add a company risk. This means that the share goes up more when the silver price goes up, and vice versa.
It is also important to understand that a silver mining company is primarily mining silver, but they also mine other metals they find. Around 60-70% of a focused silver mining company’s mined volume is silver, the rest is often gold, copper, or other metals. This means that as an investor, you also get exposure to the price of other metals by investing in a silver mining company. This has the benefit of diversifying the risk.
Commodity Funds
There are different types of silver investment funds. When you invest in a fund, you pay a fee for an expert (fund manager) to select the underlying assets that provide exposure to silver. A fund may include any of the options listed above. There are two types of funds:
- Daily traded fund: Often actively managed, which means that an expert reviews the holdings and rebalances at regular intervals.
- Exchange Traded Fund (ETF): A basket of securities that follows an index and is traded as a stock.
The price of silver
Silver is priced in USD as a standard. This makes it important for an investor to understand the price movement of USD in relation to the currency the investor is trading in. If you for example live in Europe and invest using the euro (€), the euro’s relative price in relation to the USD will affect your trade. A strong USD in relation to other currencies makes it more expensive for the holder of the weaker currency to buy silver. This effect results in that the spot price of silver measured in USD can decline in one currency, but appreciate in another currency. This is illustrated in the image below where the price of silver has increased 4,96% in USD and 22,55% in EUR during the past five years (2018-2022).
Investing in silver and the future
The data from The Silver Institute indicates that the demand for silver is on the rise, and we believe it will continue to do so due to the green transformation and monetary inflation.
The green transformation
Silver has a pivotal role to play in the development and production of green technology. It is found in many car components through EV’s electronic systems including, but not limited to, conductive pastes, circuit-breakers, fuses, switches, and relays. Its superior electrical properties makes it a hard metal to replace across a wide range of automotive applications. Silver plays an equally important role in producing solar panels, where silver pastes are widely used to ensure the electrons move into storage or towards consumption.
Monetary inflation
During the past years we have seen a record balance sheet expansion of the world's central banks. It started during the last financial crisis in 2008, and has been increasing ever since. The Corona pandemic resulted in this escalating even where the US Federal Reserve created a fifth of all dollars ever created during 2021.
The economic damage from the war in Ukraine will contribute to a significant slowdown in the global growth in 2022 and add to inflation. Both fuel and food prices have increased rapidly. According to the IMF, global growth is forecast to slow down from 6.1% in 2021 to 3.6% in 2022 and 2023. Because silver, gold, and other precious metals derive their value differently than paper currency and stocks, they are fairly resistant to inflation. However, due to silver’s industrial applications that tie it to the fortunes of numerous industries, the value of silver usually fluctuates more than gold.
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Conclusion
Silver possesses both monetary and industrial properties, making it an indispensable metal for our high-tech and upcoming green world. Similarly to gold, it is also a reliable way to safeguard wealth against inflation. For investors looking to enter the silver market, it is worth considering investing in the silver mining companies rather than the metal itself.
A business may expand due to operational excellence and grow its profits, leading investors to push the stock higher. In contrast, a physical commodity does not generate cash flow; the only reason for its price to change is because someone wants to pay more or less for it.
Due to silver’s volatility and dependence on different industries, it is close to impossible to predict what the silver market will look like in the future. Therefore, investing a recurring flat-amount of money every month is advised. Invest in the world’s best silver mining companies through AuAg to the benefit of your portfolio, the silver mining industry, and the world.
Why invest in silver mining companies with AuAg Funds?
AuAg Funds offers funds that focus on providing exposure to precious metals and elements in green technology. What they have in common is that these assets offer protection against monetary inflation and are necessary in the transition to a green economy – trends that are highly topical today.
AuAg Funds offers exposure to silver both via daily traded funds and an ETF. The fund, AuAg Silver Bullet, invests in silver mining companies, whereas the AuAg Gold Mining fund invests in gold mining companies. By investing in gold and silver mines, the funds provide a leveraged gold and silver investment. The funds find gold and silver mining companies to invest in through a rigorous investment process which also takes sustainability aspects into account.
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