Gold isn’t the only metal investors are using as a hedge this year. Silver, a cheaper alternative to the yellow metal, has also taken off as investors speculate that the gray metal may be a bargain in the current environment.
Gold prices topped $1,840/oz on Tuesday, the highest level in nine years, and just 3.1% below the metal’s all-time high of $1,900 set in 2011. ETFs that track gold, like the SPDR Gold Trust (GLD), are up 21% year to date.
Meanwhile, silver prices surged above $21/oz for the first time since 2014, fueling a year-to-date return of 18.7% for the iShares Silver Trust (SLV). All of silver’s gains for the year came this month, as traders shrugged off declining industrial demand to focus on the metal’s use as hedge similar to gold.
Spot Silver Prices
Like gold, which is benefiting from all manner of economic and financial concerns, silver is being driven by similar factors. Gold has rallied steadily throughout 2020 thanks to its perception as a safe haven against inflation, deflation, economic contraction and stock market woes.
About $39.5 billion flowed into global gold ETFs during the first six months of the year—more than any year in history, according to the World Gold Council.
The same dynamic is playing out in silver. Holdings of silver in exchange-traded products increased by 196 million ounces in the first half of the year, easily surpassing the previous annual record haul from 2009, according to The Silver Institute.
The vast majority of those inflows came from investments in the iShares Silver Trust (SLV), which pulled in $2.7 billion of new money this year. SLV is the giant in the silver ETF space, with total assets of just over $10 billion.
This year’s breakout in silver prices comes even as demand for the metal in key industrial applications is set to decline. According to Metals Focus, an independent consultancy, industrial demand for silver is forecast to drop by 7% this year.
At the same time, demand in other silver segments, such as photography, jewelry and silverware, is also poised to fall by 7-10%.
Together, those segments account for nearly 70% of global silver demand, and their weakness is likely what pushed silver prices close to $11—a decade-low—in March.
More recently, the market has been focused on the surge in demand from ETFs, as well as a 16% jump in demand for physical silver bars and coins. Adding to the bullish bias is an anticipated 7% decline in silver mine production due to COVID-19 related stoppages.
With an increasing proportion of silver demand coming from investors, swings in the metal’s prices may become more volatile. For now, investors seem to be keying off the fact that, unlike gold, silver is still well below its all-time highs.
Prices for the metal peaked at just under $50/oz in 1980, a level that was nearly matched in 2011, when prices topped $48.
Back then, it took only 32 ounces of silver to buy 1 ounce of gold. Today it takes 87—though that’s down from the record 124 ounces it took in March.
Silver bulls reason that, in relation to gold, the grey metal is undervalued, and it will take a much higher silver price to bring the gold/silver ratio back to historical norms. Since 1950, the ratio has averaged close to 60, which, based on current gold prices, would equate to a silver price of $30.67.
Of course, there is nothing close to a guarantee that the gold/silver ratio will revert to a particular level, that silver prices will follow gold prices higher, or that either metal will continue rallying from here.
The set of investors who believe that silver makes for a good hedge is much smaller than those who believe in gold’s safe-haven properties. Many silver investors consider the metal a leveraged bet on gold, but prices for the two metals often diverge, making any investment thesis based on the two metals’ correlation a risky bet.
Nevertheless, at least in the past month, silver is acting like a more aggressive version of gold. Some of investors have leveraged their silver bets further by buying into ETFs that hold stocks of silver miners.
SIL, which focuses on larger miners, has outperformed, rising 36.7% so far in 2020. SILJ, with its 21.1% return, is running just slightly ahead of silver prices this year.
YTD Returns For SLV, SIL, SILJ