- The rise in physical investment
- Can higher prices be sustained?
- Protecting against silver market manipulation
Last week, European ETF titan ETF Securities started trading its first U.S. fund, the bullion- backed ETFS Silver Trust (NYSE Arca: SIVR). But with five products already on the books, does the American silver market have room for another ETF?
That's why we decided to sit down and talk silver fundamentals with Nicholas Brooks, head of research and investment strategy for ETF Securities. With over 15 years' experience as a global economist and strategist, Brooks has worked with Henderson Global Investors, Deutsche Bank and Citibank.
Recently, HAI associate editor Lara Crigger chatted with Brooks about the rise in physical silver investment, the connection between the gold and silver markets and whether the higher prices can be sustained.
Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): We've really seen an uptick in silver demand recently, especially physical investment. What's driving that?
Nicholas Brooks, head of research and investment strategy, ETF Securities (Brooks): To some degree, what's going on with silver is related to what's going on with gold. Investors view silver as a safe haven asset in the same way they do gold, and as a hedge against inflation and possible paper currency weakness. So silver is benefiting from the still-high uncertainty over the outlook for the global financial system and over what government intentions are, given the aggressive quantitative easing and the rapid run-up in government debt levels.
Crigger: We're starting to see physical investment in silver on the rise, while physical investment in gold is dropping. What's the reason for this? What advantage does silver have over gold?
Brooks: Silver is a very interesting commodity, because it's a hybrid between an industrial metal and a precious metal. About 53% of the end demand for silver is from the industrial sector, compared to around 12% for gold. So silver demand is more sensitive to swings in the business cycle than gold is.
In this environment, silver is in a very fortunate position. There's still lingering uncertainty about structural risks to the global economy, but at the same time, lead indicators of global industrial activity have picked up strongly since late February, early March. We've seen a very strong run in many of the more cyclically oriented commodities, especially industrial metals like copper. So I think silver's been benefitting from that, while at the same time, lingering concerns about the outlook for global financial stability, potential future inflation, rising government debt levels and the long-term outlook for the U.S. dollar are causing investors to increase their weightings in silver.
Crigger: So no matter whether the economy improves or gets worse, silver is poised to take advantage of the situation.
Brooks: That is where the "hybrid" nature of silver makes it quite a unique investment in the current environment. Of course, if the world is really, truly falling apart, I'd probably choose gold first, silver second, since gold still generally acts as the No. 1 safe haven and alternative to paper currency. But silver comes in at a close No. 2 and is a way for investors to diversify their position in "safe haven" precious metals. But if the global macroeconomic picture continues to improve and the industrial cycle continues to pick up, then I think silver will continue to outperform gold.
Price performance over the past 12 months shows this dynamic. In the second half of last year, when it looked like the world was falling apart, gold performed very well on a relative basis. Silver fell pretty sharply, although it didn't fall as sharply as some of the more cyclically oriented commodities, and it held up better than a lot of the industrial metals. When we moved into 2009, we saw relative performance reverse: Gold has held up well but has generally been range-trading. However, once the industrial cycle started to pick up, silver started to really move. We're still in that environment at the moment, with investors still feeling relatively bullish; therefore, silver has been the outperformer.
Crigger: Traditionally, silver has been very volatile compared to gold. But as more investors pile into silver, do you think that volatility may begin to abate?
Brooks: Silver's volatility ties back to its industrial nature: It tends to be more strongly affected than gold by swings in the industrial cycle and perceptions about where the cycle will go. Going forward, I think that will probably remain pretty much the same. Silver's key drivers - investors' desire for a safe haven and industrial demand - are unlikely to change.