At the moment most of the focus on commodities that I have been seeing has been on gold and oil, and what people are forecasting for the coming months and longer term. But I suggest we are missing a great opportunity here. Whilst I do follow both of these asset classes closely, my own attention has been on silver, as I think there is a lot of potential future upside from the current price levels that we are seeing of around $12.50 per ounce, and I’ve been happy to buy some physical myself down here, and with plans to add more. There is still potential for the price to go lower - it briefly dipped below the $10 mark in the 2008 banking crisis crash - but ultimately I see a good chance of a very strong recovery in the coming years...
Silver is interesting, as not only is it seen as a store of value, but it is also an industrial metal and is used in pretty much all electronics, plus various chemicals, water purification, and a number of other applications, with around 60% of its demand coming from here. That means that an economic downturn is going to have some impact on demand, especially when you consider that a significant amount comes from the automotive sector. But that will pick up again in the future, and in recent times we have been seeing production of the metal dropping – even more so when looking at mines specifically targeting silver, as opposed to it being a by-product of gold and lead/zinc operations. In addition to this, having seen a surge in the scrap market in 2011/12 as a result of prices soaring to close to $50/oz, the supply from that has dwindled in recent years. On top of that you have the fact that silver is in demand as a store of value - not quite to the extent of gold but it has historically always been a very popular investment - and although the popularity of bullion coins has been on the decline over the past couple of years, it seems to be making a resurgence at the moment as people scramble for them at a time when it is hard to earn any sort of return in other ‘safe’ investments due to interest rates being so low. Currently silver bars and coins seem to be selling at a premium to the spot price, especially if you are looking to buy smaller amounts of the metal and, whilst this isn’t all that unusual, the premiums do seem to be higher than normal and I’ve heard anecdotal evidence of long delivery times, which to me suggests a shortage. In addition to that I would also expect silver ETFs to grow in popularity, and that will also add to demand for the metal.
So, based on all of that then, I see the current spot price level as offering good value and with lots of upside potential. Even more so if you are looking at more than just trading a bounce, and hold for when the markets recover over the next few years – assuming of course that we see several quarters of severe negative growth as a result of the virus, before things then improve as a vaccination becomes available and confidence returns, rather than a full blown depression lasting for years. Whilst I would expect plenty of caution, plus the knock-on effects of the massive amounts of stimulus that many countries are and will be injecting, the world economy will eventually recover, and, taking a very long term view, I can only really see demand for silver increasing due to the industries that it is used within, and there are indications that we could see supply shortages in future due to a lack of new mines coming online. I know that many people will be confused as it is as to why the silver price has dropped so low - not to mention why gold isn’t also a lot higher - and there are several reasons for that.
Firstly, the US Dollar is incredibly strong at the moment, with the DXY (Dollar basket) index being around the 102 level, which is pretty much the highest it has been since the start of the millennium, when it briefly got up to around 120. This index measures the strength of the Dollar against a basket of other currencies, and helps to explain some of the weakness in not only silver, but also gold, at a time when you would certainly expect the latter to be putting in a much stronger performance. Currently the Dollar is still showing signs of strength in spite of the massive stimulus package that the US is planning for its economy, and that is largely as a result of the high level of demand for Dollars in a crisis like we are currently seeing. But eventually I would expect that to subside and the Dollar to weaken, and we may even see the US take active measures to ensure that happens as it doesn’t want its currency to be this strong, and when that happens it should give precious metals like silver and gold a boost to some extent. Quite possibly the biggest factor in all of this though, and one which many people miss and leads to confusion over the spot price action that we see, is the amount of silver which is traded via derivatives as compared to the actual physical market for it. Short positions now do seem to have reduced dramatically, certainly if we look at the Comex, the main derivatives market, and have pretty much halved since the start of the month, having been even higher around the start of the year. But we also aren’t seeing people piling into long positions either just yet. So, overall I believe that the downwards pressure on the silver spot price is beginning to ease, plus on commodities it is often forward-looking anyway, and is already factoring in some future turmoil to come. We may well see further dips along the way - in fact I’d be amazed if we don’t - but all things considered I see this as a buying opportunity, either for the physical metal, or exposure to the spot price via CFDs/SBs (just try and choose a provider with a strong balance sheet that can survive the current crisis!). Based on all of this, I know that people will also be wondering about investing in equities in the form of silver miners, and in the UK the best way to get that sort of exposure is via either Hochschild Mining (HOC) or Fresnillo (FRES), both of which have been previous favourites of mine when silver was stronger.
Hochschild is smaller and has been hit far harder due to the fact that most of its production is silver, although it did also produce 270,000 ounces of gold during 2019, and two of its mines in Peru have had operations halted due to a state of emergency being imposed to try and contain the spreads of coronavirus, and the situation is the same in Argentina at its San Jose mine. But if I had to pick between the two, Hochschild would be my choice at a share price of 88p and a market cap of around £455 million, as it has very low levels of net debt, and although this shutdown is far from ideal, it is something that it should be able to survive without any lasting damage to the business. That being said though, my choice at the moment would still be silver itself, as although you won’t see the same leveraged upside in a recovery that you get with a miner like Hochschild, it is also far less risky at the moment. When we eventually do see a proper recovery there will be plenty of opportunity to invest in Hochschild shares then, rather than trying to guess where the bottom will be during a downtrend.
Filed under: silver, Hochschild Mining, Versarien, David Lenigas, Doriemus, RPS, Eve Sleep, gold
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