Forget About Gold: Silver's Really Shining Right Now

Not all that glitters is gold. The precious metal might overshadow the rest, but as it turns out, silver’s pretty glitzy too. See, it’s not only good for jewels and jazzed-up antique furniture, it’s a must-have in the industrial sector too. And with a reputation like that, silver could stand up no matter if the economy’s stronger than ever or more volatile than before. Thing is, this industry’s far from straightforward. So let’s find out if silver deserves more than a runner-up medal – and if it does, how you could invest in the unique commodity.

Where does silver come from?

You might be picturing a silver mine, real “Snow White” style. But actually, the metal’s mainly a byproduct of extracting other metals like lead, zinc, copper, and gold. In fact, that’s where 72% of the world’s supply comes from. Geographically, it’s more split: production is mainly concentrated in the Americas, with 42% of silver sourced from Mexico, Peru, and Chile. Further afield, China, Australia, and Russia combine to make up another 24% of the world’s production.

What’s silver used for?

For centuries, silver has adorned luxury items like jewelry, tableware, and fine art, appealing to collectors for its durability and aesthetic allure. Still today, around a quarter of silver's demand comes from these decorative segments. But it’s not all about luxurious living. Silver’s become a status symbol in the industrial world over the last few years too, since it can conduct heat and electricity well, react to light in certain chemical states, and be stretched into thin wires or sheets without breaking. Thanks to that triple-threat skillset, silver plays a pivotal role in many fast-growing electronics segments including solar panels, LED lighting, flexible displays, touch screens, RFID tags, cellular technology, and water purification. What’s more, most of those applications just need a sprinkling of the metal, so they don’t even bat an eye if the price is higher than usual – and they certainly wouldn’t bother to seek out alternatives.

2022 global silver demand by category. Source: Global X ETFs.

How does silver compare to gold?

Silver has more weight in the industrial industry: 46% of silver’s yearly consumption comes from the sector versus just 6% for gold. Instead, gold’s mainly sought after for jewelry, physical bars for investment purposes, and central bank buying. That means while gold is primarily a precious metal, silver's price is influenced by its demand as both a precious metal and an industrial material. Also, because the silver market’s much smaller than the gold one, the combination of heady trades and lower liquidity in the space make silver’s price way more volatile than gold’s.

Mind you, the metals do have a lot in common. Both tend to do well when bond yields are falling, inflation is rising, the US dollar is weakening, the market’s getting more turbulent, or a combination of a few. See, when bond yields dip, so does the opportunity cost – that’s the money you miss out on from the alternate investment, in this case, bonds – of holding precious metals, which don’t pay investors any regular income. In periods of rising inflation, investors like that silver will retain its value while fiat currencies lose their purchasing power. And like most internationally traded commodities, silver’s price is quoted in dollars. So when the currency weakens, silver becomes cheaper to buy overseas, increasing international demand and pushing up the metal’s price. Finally, during periods of economic and geopolitical volatility, investors flock to safe-haven assets including precious metals.

The gold-to-silver ratio is, as you might’ve worked out, a measurement commonly used to compare the two metals. It indicates how many ounces of silver you need to purchase one ounce of gold, gauging their relative value and highlighting when one is potentially cheaper or more expensive than usual. Over the past 30 years, the ratio has averaged around 67. Today, it’s closer to 84, signaling that silver seems undervalued compared to gold.

The gold-to-silver ratio is currently about 84, compared to its 30-year average of approximately 67. Source: Bloomberg.

What’s the supply and demand outlook for silver?

Demand for silver is rising a lot faster than its supply, mainly because the metal’s being sucked up by solar power manufacturers. Solar is forecast to make up 14% of total silver consumption this year, for example, up from 5% in 2014. (Remember from earlier that silver’s superior electrical conductivity makes it important in solar cell technology.) What’s more, the solar industry’s newest, most efficient models use a lot more of the metal than older versions did. So with a major worldwide push toward renewable energy sources and a rapidly expanding solar industry, particularly in China and India, the need for silver has never shined brighter.

Thing is, supply isn’t keeping up. Recall that most of the metal comes as a byproduct of extracting other metals. And because relatively low profit margins haven’t enticed mining companies to develop new silver projects, it’s likely that supply will lag behind demand for some time. Even last year, supply was flat as demand rose by nearly a fifth. This year, production’s forecast to increase by a paltry 2% while industrial consumption – the biggest demand driver for silver – is set to climb by twice that.

Silver demand is growing faster than supply. Source: Bloomberg.

The strain on supply is so significant that a study from the University of New South Wales forecasts that the solar sector alone could exhaust between 85% and 98% of global silver reserves by 2050. Unless current trends veer off course or silver somehow comes into bountiful supply, the metals’ price should fly upward.

How can you invest in silver?

If you want to stick close to the actual price of silver, or if you’re preparing for a doomsday scenario of complete monetary and financial system collapse, you’d probably want to buy the physical metal. But unless you’re happy to stash that bullion at home, you’ll have to pay annual fees for storage and insurance. Plus, some dealers charge chunky premiums to buy and sell silver, which can eat away at your returns.

Futures contracts, meanwhile, have the advantage of leverage. That means a small outlay gets you the exposure to the same levels of profit (or, crucially, loss) that you’d get from investing a much bigger amount straight in silver itself. But that’s also a drawback: the smallest futures contract is worth 1,000 troy ounces, so a silver price at $23 per troy ounce means you’re looking at making a bet worth at least $23,000. (Gulp.) And because futures contracts have expiry dates, you constantly have to reinvest in newer contracts that are typically more expensive than the spot price of silver. All that rolling over adds up over time.

Unlike futures contracts, silver ETFs are super easy to access: anyone with a brokerage account can buy in. They might not have the leverage of futures, but ETFs replicate silver price performance by either holding physical silver or investing in silver futures contracts. Thing is, that means they face the same problems as those individual approaches, racking up either storage and insurance costs or the hassle of constantly reinvesting funds into newer, pricier contracts. Combine that with (albeit small) management fees, and ETF performance inevitably deviates somewhat from that of actual silver. But still, if you want a less hands-on way to get involved, the iShares Silver Trust (ticker: SLV; expense ratio: 0.50%) is one of the biggest and most popular silver ETFs.

Your final option is to invest in shares of silver-mining companies. These firms have high fixed costs and variable revenue, so they’re essentially “leveraged bets” on the price of silver. That means their share prices stand to do really well if the price of silver heads up – though the opposite is also true. Another advantage of this approach is regular income: ironically, unlike the metal they unearth, many miner stocks pay a dividend.

The downside is that there aren’t many “pure” silver miners available – that is, those that derive a significant share of their revenue from exploring, mining, and transforming silver. Most, after all, have diversified into gold and other metals, so you could indirectly be affected by the prices of other commodities. What’s more, individual companies are more exposed to a range of idiosyncratic issues including politics, environmental concerns, and operational blockage, all of which can introduce unwanted risks to your portfolio. So if you choose to invest in silver miners, a straightforward strategy may be to invest in an ETF – like the Global X Silver Miners ETF (ticker: SIL; expense ratio: 0.65%) – that offers diversified exposure to a range of silver-mining stocks.