Silver’s Dull Year Might Not Tarnish Miner ETF

Over silver and gold’s long histories as industrial commodities and financial assets, silver, drawing more speculative interest, has been the more volatile.  

Silver’s lower per-ounce price and penchant for high price variance often lead trend-following speculators and investors to flock to the metal when price trends develop. A bullish trend often attracts far more interest than a falling price.  

Silver mining stocks can turbocharge upside returns during bull markets as mining companies offer leverage. Miners sink significant capital into mining projects in a bid to extract the metal at lower production costs than market prices. This means rising silver prices can translate to an outperformance of mining companies’ stocks on a percentage basis.  

Individual silver miners have idiosyncratic risks, including management, specific mining properties, and geographical and political risks. The Global X Silver Miners ETF (SIL) owns a portfolio of the leading silver mining companies. Diversified holdings mitigate some idiosyncratic risks of owning individual silver mining companies.  

No Shine to Silver This Year 

Silver has traded in a consolidation range since the end of 2022. 

Source: Barchart 

The 10-year chart above highlights the $19.83 to $26.20 range in the continuous COMEX silver futures contract. Silver was just above the trading band’s midpoint at $23.617 on Aug. 4. Silver futures closed 2022 at $23.862 per ounce. On Aug. 4, they were only 1% lower since the end of last year. 

SIL Has Underperformed the Metal 

SIL owns shares of silver mining companies in many of the leading silver-rich countries worldwide.  

Source: etf.com 

The chart above show that SIL closed 2022 at $28.17 per share. On Aug. 4, SIL was over 7% lower, at $26.17, underperforming silver since the end of last year.  

SIL is a liquid product, with nearly $866 million in assets under management. SIL trades around 420,000 shares daily and has an expense ratio of 0.65%.  

You can compare SIL against the iShares Silver Trust (SLV) with the etf.com comparison tool here. 

The Case for Silver Miners 

At least five factors support silver prices and the shares of the companies that mine the metal.  

• Based on falling inflation readings and a robust stock market, the U.S. economy could be heading for a soft landing, supporting industrial metal prices. Silver has many industrial applications.  
• The trajectory of Fed interest rate hikes will likely slow with falling inflation. While higher interest rates tend to weigh on silver and most commodity prices, silver prices have held up well.  
• The dollar index has declined from a two-decade high at 114.745 in September 2022 to below the 102 level. A falling dollar tends to support silver and gold, and other commodity prices.  
• Silver supply and demand fundamentals indicate a growing deficit. Silver demand rose 18% in 2022 to a record high of 1.24 billion ounces, creating a 237.7 million ounce deficit. Demand from electronics, solar panels and other industrial uses should continue to increase, and investment demand could grow. India imported vast amounts of silver in 2022.  
• As the demand for silver grows, the price could increase, incentivizing silver mining companies to increase production.  

Since falling to an $11.735 per ounce low in March 2020, as the pandemic caused most commodity prices to reach multiyear lows, silver prices rose over 102%. SIL reached a low of $16 in March 2020.  

At $26.17 on Aug. 4, it was 64% higher. However, a sudden surge in silver prices that takes them over the $30.16 technical resistance level could propel SIL higher and outperform the metal on a percentage basis.  

Significant Outflows in SIL 

Buying SIL in the current environment is a contrarian approach. In 2023, SIL experienced significant outflows. 

Source: etf.com 

The above chart of etf.com’s Fund Flow Tool shows the net outflow of nearly $14 million from SIL since the end of last year. In silver, a contrarian approach can be optimal, as buying precious metals on price weakness has been a winning strategy since the turn of this century.  

Silver futures were below $5 per ounce at the end of 1999, and while there have been explosive rallies and implosive sell-offs, the price has trended higher over the past nearly 24 years.  

It’s not been a successful year for silver mining stocks, which could be the best reason to add them to your portfolio via SIL. Silver has compelling supply and demand fundamentals, the long-term technical trend and macroeconomic factors support higher prices.  

It is virtually impossible to pick bottoms in any market, so leave plenty of room to add on further weakness.