Why Investors Need to Look at Silver in 2024

Many investors believe that gold is a hedge against inflation. And yes, while that is true, the role of gold goes much deeper than that.

Gold’s real purpose is to act as a hedge against government hubris.

We aren’t trying to get overly political here… you can pick up any newspaper and get that for yourself. But it's quite obvious to anyone paying attention that government’s around the world are becoming quite intrusive.

When the government gets overly expansive and has to print new money to pay their large debts, more people begin to doubt their government’s solvency.

And whenever the solvency of a government comes into question, the rich begin to hedge against it.

They begin to hoard real assets – gold and silver.

Now, we aren’t going to get into the power and investment potential of gold here – you can read our Ultimate Guide to Gold Investing report for that. That’s because, although we believe having exposure to gold and gold companies is a no brainer, silver on a relative basis is actually much more undervalued than gold. To understand this, you need to understand the gold to silver ratio. Let us explain…

Trading the Gold to Silver Ratio

Over hundreds of years, the ratio of silver’s value to that of gold has always seemed to settle in the same range – 16:1. That is, where 16 ounces of silver equals one ounce of gold.

The ratio is actually so accurate that dozens of governments have set their monetary policy at or around this level. For example:

• In 1803, Napoleon established the Bank of France to stabilize a franc. He set the gold/silver ratio at 15.5:1

• In 1816, when the British went back on the gold standard after the wars with France, they chose a 16:1 ratio

• Even in America, when the time came to establish an independent currency in 1792, the country used a gold to silver ratio. The US dollar was defined as 371.25 grains of pure silver and/or 24.75 grains of pure gold – a 15:1 ratio.

By employing the classic and well-established gold-to-silver ratio of 16:1, it would suggest that today – with gold trading at around $1,900 – the value of silver should be roughly $120.

However, in reality, silver is currently trading for just $23.

This indicates that today’s gold-to-silver ratio is sitting at about 80:1.

So, what causes this discrepancy?

Without getting into the specifics, the discrepancy happens thanks to silver's demand as a currency.

It might seem odd, but when both gold and silver are undervalued compared to their historical averages, gold actually outperforms silver. Whether due to gold’s ability to be more divisible, or silver being “demonetized”, the fact is that this ratio at times gets out of whack.

But, in periods of economic turbulence, silver almost always comes back to the 16:1 ratio.

For example, during World War I, the ratio fell to 16:1. Then again in 1980, when America was going through a severe money crisis, the ratio fell to 14.82:1.

Simply put, both gold and silver are a great hedge. But based on the historical gold to silver ratio, gold is overvalued compared to silver. Thus, if there is any economic crisis, silver stands to increase in value much more than gold.

While it is worth exploring silver's value as a monetary instrument as explained above, the amazing thing about the commodity is its utility. And right now, that utility may just create the most demand the metal has ever seen in history.

Silver’s Utility Value Leads to An Increase in Demand

Silver is one of the most unique metals on the planet.

It is one of the most electrical and thermally conductive metals to ever exist. It is strong, yet malleable, and is able to endure extreme temperature ranges.

Silver is used in both large and trace amounts in nearly every electronic device in the world. It is used in glass, solar panels, photography, and even medicine. And of course, it is used in silverware and jewelry.

But while silver has always been used in industrial applications, two recent changes are set to explode the amount of silver needed.

Solar Panels (photovoltaics)

Agree with it or not, the world continues to adopt a green energy transition. One of the main contributors to this transition are solar panels, also called photovoltaics.

In 2022, the world reached a new high of photovoltaic installed capacity of 1 terawatts (TW), representing ~4% of all worldwide electricity demand. While that may not seem like a lot, governments around the world are indicating that in order to “mitigate climate change,” this number needs to be 15 - 60 TW by 2050.

This growing demand for solar panels has caused a spike in silver demand over the past few years. Since 2014, the demand for silver for the use in solar panels has grown from 50 million ounces (Moz) to more than 150 Moz projected for 2023.

This is because silver in paste form provides a conductive layer on the front and back of silicon solar cells. In 2014, solar panel installations represented 4.78% of all silver demand. By the end of 2023, this number is expected to reach 14%.

Much of this growth is coming from the increase in China, which is on track to install more solar panels this year than the US.

But while the solar industry has become much more efficient at using silver in solar panels, recent changes are actually showing that silver usage will actually increase on a per panel basis.

For years, solar cells have used a technology known as PERC (passivated emitter and rear contact cell). PERC panels use ~10 milligrams of silver per watt.

However, over the past few years, two new forms of solar cell technologies are beginning to be implemented… ones that use much more silver.

These are known as TOPcon and HJT (heterojunction technology). We aren't going to go into the science and technology of these kinds of cells. All you need to know is that TOPcon uses 1.3-1.5x as much silver as PERC, while HJT uses 1.6-1.8x as much.

What this means is that while solar panel installation is expected to skyrocket in the coming years, the solar panels are expected to actually need more silver not less… almost double.

Recent research actually shows that more than 20% of the silver supply will go to solar panels by 2027 and approximately 85–98% of the current global silver reserves by 2050.

So if demand is significantly increasing, it stands to reason that supply is too… right? Wrong.

Demand is increasing while supply is decreasing

From 2021 to 2022, the global supply of silver around the world actually decreased by 1%, from 25,741 tons to 25,578 tons.

Take a look…

How can this be?

The main issue is that increasing the supply of silver is not an easy task. This is because more than 80% of silver doesn’t come from a primary mine – that is a mine dedicated to mining silver. Most silver is a by-product that comes from the mining of gold, copper, lead, zinc, etc.

Combine this with the recent drop in mine production across the globe and you have a recipe for a decrease in supply.

But this isn't the only reason. Other factors are also leading to the decrease in silver supply. Let’s go through a couple quickly.

The Russian–Ukraine War Will Impact Russian Silver Industry

As shown in the table above, Russia is the 6th largest country when it comes to silver supply.

And while the country’s silver output actually increased in 2022 by 6% YoY, that number is expected to decrease in the years to come. Sanctions have made it difficult for the country’s miners to import needed equipment. Furthermore, Western sources of financing have been all but cut off. For example, Kinross Gold – one of the largest miners on the planet – recently suspended operations in Russia.

Social Unrest in Peru

In 2022, Peru’s silver output fell 7.3%, falling behind China, to become the third largest producer of Silver.

The disruption was caused by protests in response to Peru’s President, Pedro Castillo’s, impeachment in December 2022. Protests in Peru’s “mining corridor” have disrupted operations at multiple mines around the country.

The Second Largest Silver Mine in the World is Currently Offline

Editor’s Note: On October 5, 2023 the four-month strike officially ended

As of writing, the Peñasquito mine in Mexico has been offline for more than 120 days over a wage dispute.

Unionized employees in Mexico are demanding an increase in the uncapped profit-sharing benefit from 10% to 20%.

The Peñasquito mine is the second largest silver mine in the world, producing more than 32 million ounces of silver in 2022.

All of this has led to a huge deficit in silver

The increasing demand and decreasing supply of silver (as explained in the sections above) created a deficit of 237.7 Moz in 2022 – the largest in history for the metal (further details and all of the data can be found in the Appendix).

And it wasn’t just 2022. According to the Silver Institute, 2023 is projected to have a deficit of 142.1 Moz, the second-largest deficit in more than 20 years.

If you were to add up the deficits from 2021-2023, it would add up to a 430.0Moz decrease in global silver inventories. To put this in perspective, that would represent more than half of the inventories held in London vaults that offer custodian services.

Putting all of this together, we expect silver (and silver miners) to significantly increase in value in the coming years.

How to invest in Silver

Physical Silver

By far the easiest and safest way to play the silver market is through physical silver. There are two primary ways to do so depending on your individual portfolio and preferences.

Physical Silver Bullion & Coins

The most straightforward way to buy silver is through bullion coins. Mints around the world, including the US Mint, produce silver coins that trade at a very small premium to their bullion value. Although the mints make coins in all different sizes, we suggest the 1oz coins which are easy to understand and trade worldwide.

The most popular 1oz silver coin is the U.S. Silver Eagle which comes from the US Mint. When the US Mint sells coins to authorized distributors, they sell them in what are known as “Monster Boxes” of 500 coins, made up of 25 sleeves of 20 coins. We suggest purchasing Silver Eagle’s in sleeves, or if you are able, your own “Monster Box”.

Physical Silver ETFs

Although we highly suggest holding physical silver (and gold), doing so can become a burden at a certain point. You have to store it and there are safety concerns.

Physical silver ETFs, on the other hand, are highly liquid and you can buy and sell them right through your brokerage account. This allows you to quickly allocate more or less to silver as you see fit.

Although most silver ETFs are quite similar, the main things to consider are reputability and expense ratios. The largest silver ETF is the iShares Silver Trust (SLV) which has an expense ratio of .50%.

Other good silver ETFs include the Aberdeen Physical Silver Shares ETF (SIVR); Expense Ratio: 0.30% and the Sprott Physical Silver Trust (PSLV); Expense Ratio 0.67%.

Another great way to own silver is through the Sprott Physical Gold and Silver Trust (CEF). It is worth noting though that the portfolio of CEF is 65% gold and 35% silver. But, we believe it is the perfect way to get exposure to both gold and silver.

There are two major benefits of buying your gold through the Sprott Physical Gold and Silver Trust.

The first is that it’s a closed-end fund. This means it’s one of the only ways you can buy physical gold and silver at a discount. The fund often trades at a discount of ~2-6% of its Net Asset Value (NAV) – also known as the melt value.

You see, the closed-end fund concept means that CEF has a fixed basket of assets (gold and silver), and a fixed amount of shares outstanding. Although this makes the funds value teeter back and forth – it gives us a big arbitrage opportunity when the timing is right.

If demand for CEF shares significantly increases, the market price will trade for more than the value of its precious metals – a premium. But if the demand is low, the fund can trade for less than the value of its assets – a discount.

This discount is where much of the value lies in a closed-end fund though. As long as you purchase the fund at a discount, you always know that your investment is worth more than you paid for it.

At the time of writing, CEF is trading at a 6% discount.

The second major benefit of buying CEF shares is something most investors overlook…

The Sprott Physical Gold and Silver Trust offers a potential tax advantage for certain non-corporate U.S. investors. Traditional physical gold investors often think they’ll be faced with a long-term capital gains tax at just 15%. But that’s incorrect.

Because the Internal Revenue Service (IRS) treats gold investments as collectibles – your capital gains tax rate is 28%! And that applies to anyone who buys coins, bars, and the majority of precious metal ETFs – even the popular SPDR Gold Trust (GLD).

Buying shares with the CEF, however, is a different story. Consider it a tax law loophole. Because the IRS recognizes CEF as a “Passive Foreign Investment Company” (PFIC), the long-term capital gains tax rate is just 15% here.

That’s like saving 50% on your gold tax bill.

Silver Miners

Silver is an interesting metal when it comes to investing. Sure, hundreds of millions of ounces are pulled out of the ground every year, but most of it isn’t on purpose.

That’s because silver is usually found with other metals in the ground – mainly copper, zinc, lead, and gold. Silver is simply a byproduct of mining for these other metals.

In fact, more than 75% of global silver output is the result of byproduct mining. Only a quarter of all silver mined comes from focused silver mines.

What this means is that when it comes to investing in silver, the universe of pure-play silver mining stocks is limited. Most simply are pulling other metals up out of the ground at the same time.

But because silver is such a tiny market compared to many other commodities, especially gold, any positive price movement can result in explosive returns for silver miners.

Silver Royalties

Wheaton Precious Metals (WPM)

Wheaton Precious Metals is the largest precious-metals streaming company in the world. Previously named Silver Wheaton, the company dealt mostly with silver. That changed in 2017, after a couple of large acquisitions. Wheaton’s streams now consist of a 50/50 ratio of gold and silver.

Although Wheaton is not a pure play silver miner, we believe it is a great way to play silver safely. That’s because Wheaton’s business model is similar to other royalty companies, but with a twist.

When a base metal miner (think, copper, zinc or iron) extracts ore from its mine, it usually contains other minerals – including silver and gold. The base metal miner doesn't want the hassle of smelting and dealing with the precious metals from its mine, so Wheaton will make a deal upfront for the silver or gold (usually at a fraction of the spot price). Through this process, Wheaton has become the largest silver royalty company in the world.

Silver Junior Miners

As we have stated multiple times, since silver is mostly mined as a byproduct metal, at a certain point, it makes sense for pure-play silver miners to transition to mining other metals as well. For this reason, most pure play silver miners have smaller market caps than their gold counterparts.

For example, Pan American Silver (PAAS), which is one of the world’s largest silver miners, has slowly decreased their percentage of revenue by silver each year to the point where it now only represents 24% of overall revenue, down from 50% in 2016.

But, if you are interested in taking a dive into junior silver miners, we recommend the following as a starting point:

Other Silver Mine Operators

If you are interested in looking into a selection of metals miners that have large exposure to silver the following list is a good place to start. It is worth noting though that most of these companies are mining silver as a byproduct so their actual allocation to silver can wildly differ.

Putting It All Together

While precious metals like silver and gold should be important cornerstones of any investor’s portfolio due to their wealth preservation capabilities, at certain times, they also present much more – significant upside. Right now is one of those times.

It’s simple supply and demand. Over the coming decades, as the demand for silver is set to skyrocket, the supply simply won’t be able to keep up.

While gold often takes the limelight in precious metals investment, the potential and utility of silver shouldn't be underestimated.

With its myriad investment avenues, silver provides a multifaceted approach to wealth accumulation and preservation. From the tangible security of bullion to the nuanced complexity of miners, there's a silver investment for every risk appetite.

Our intent with this report was to equip you with the valuable insights necessary to capitalize on these truly unique market conditions. While pure-play investments in this niche are unfortunately limited, rest assured that the commodities realm is expansive and growing. We’ll be diving deeper into these in the coming months.

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