While gold garners most of the precious metal headlines, don’t forget about silver. Its 15 percent rebound in 2016 was roughly twice that of gold’s, and a 15 percent gain in silver futures thus far in 2017 is better than the 10 percent year-to-date gain for gold.
It's likely no coincidence. While this precious metal is often seen as a hedge against market and economic stress, it also is a beneficiary of growing industrial activity. The IMF forecasts 3.6 percent global economic growth in 2017, which should bolster silver demand.
Silver has strong electrical and thermal conductor properties, and is used in the production of many tech items such as smart phones, medical devices, data storage devices and television sets. Demand for usage in solar panels has been rising at an especially fast pace, and the Silver Institute predicts the solar industry will consume 114 million ounces of silver each year through 2020.
Demand for silver is strengthening at a time when supply is tightening. Several years of low prices led miners to mothball new production plans, and global silver output likely fell in 2016 for the first time in a decade, according to Thomson Reuters GFMS. It's expected to fall by 20 million ounces in both 2017 and 2018 (to 847 million ounces).
“A lot of silver miners are going out and buying gold mines. They are having a hard time finding new silver sources,” says Maria Smirnova, portfolio manager at Sprott Asset Management. She adds that even if new silver mines were discovered today, it would still take five to 10 years before they were up and running.
Silver supplies have also been falling at global central banks. Russia, India and China, for example, sold a combined 50 million ounces of silver annually for the 14 years ended 2013, but “there have been no official net sector sales since 2013,” Smirnova says.
A Range Of ETF Choices
ETF Investors can choose from a range of choices to profit from a potential increase in silver prices. There are funds that own silver, some that invest in silver futures, and some that deploy 2X and 3X leverage for people who are especially bullish on silver prices. Silver miners are a separate subset.
With $6 billion in assets, the iShares Silver Trust ETF (SLV) is the most popular choice. The fund, which sports a 0.50 percent expense ratio, owns silver directly stored in vaults. And its pre-expense performance has been a strong proxy for silver prices. This ETF gained a stunning 168 percent in the two years ended 2010 because silver—and gold—often are seen as a hedge against global market stress.
But a sharp hike in mining output in response to high prices led to sharp price declines. A $10,000 investment in silver at the start of 2011 would be worth $4,369 by the end of 2015. Silver prices have been on the mend since February 2016, rising 24 percent since then.
The ETFS Physical Silver (SIVR) is the next largest silver ETF, with $358 million in assets. This fund also owns silver directly, and like SLV has lost around 11 percent annually over the past five years. SIVR carries an expense ratio of 0.30 percent.
The PowerShares DB Silver Fund (DBS), with $28 million in assets and a 0.79 percent expense ratio, takes a different approach by focusing instead on silver futures contracts. Jason Bloom, global market strategist at PowerShares, notes that the fund has generally lagged physical silver ETFs due to the slightly higher cost of ownership for rolling futures contracts.
Still, these futures-focused funds carry a tax advantage. They distribute 60 percent long-term and 40 percent short-term capital gains, regardless of the holding period. Investors in funds that physically hold silver have their short-term gains taxed at ordinary taxable income rates.
The PowerShares fund is underpinned by an “optimum yield” index developed by Deutsche Bank. This approach aims to roll over futures contracts to the best-priced available futures, and not just the next one in line, as many futures-based funds do. That should eliminate some of the drag associated with next-contract rollovers, otherwise known as contango. Contango occurs when a far-future delivery price costs more than a nearer-future delivery price. Investors lose money when expiring contracts are rolled into more expensive future contracts.
As another twist, this fund earns interest income on fund assets that are not tied up in futures contracts (which require only small cash outlays to garner the full impact of changes in silver prices).
Lever up?
As noted earlier, the supply-and-demand picture is brightening for silver, which may tempt some investors to make more aggressive investments in the commodity’s potential price upturn.
The ProShares Ultra Silver ETF (AQG), with $310 million in assets, is intended to move at twice the rate of underlying silver prices. This fund is already up an impressive 28.5 percent in 2017, but can quickly give back similar-sized gains due to its leverage. In addition, costs for active traders are burdensome, given its 0.95 percent expense ratio.
Bullish investors with a high-risk tolerance can ratchet up their bet with the VelocityShares 3x Long Silver ETN (USLV). The fund’s 43 percent return thus far this year is impressive, but the flip side of being highly levered is that it lost 48 percent or more of its value in three of the past four years. This isn't a fund for investors with weak stomachs and slow trigger fingers.