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While other commodities – such as oil and gold – tend to grab the spotlight, another commodity has led the way higher in 2016.
That commodity in question is silver, which currently stands at $20.30 an ounce. Brexit has turbocharged its performance; silver has risen 15% since the Brexit referendum. The precious metal is now up nearly 50% for the year and sits at a two-year high.
This follows a tough stretch for silver bulls. Silver hit a 31-year peak of $48.44 an ounce in April 2011 before falling as low as $13.63 in December 2015. That was the lowest level since September 2009.
Silver’s outperformance has induced investors to pile into silver-backed ETFs. Holdings have climbed by 31 million ounces so far in 2016. That is the first significant increase in holdings since 2012.
What’s been behind the sudden surge in silver?
Silver and Central Bank Bumbling
The main cause for the rise stems directly from the policies of the world’s major central bankers.
Michael Armbruster, principal and co-founder of Altavest, summed it up succinctly for MarketWatch: the bull market in gold and silver is really “all about negative real interest rates, currency market volatility and failed central bank policy worldwide.”
In effect, gold and silver are resuming the roles they once held as currencies. And they are alternative currencies that are not someone else’s liability.
Silver: Just an Afterthought
On the fundamental side, the real story in silver is supply. There is simply less silver being mined globally than in previous years.
Many investors are unaware of the fact that roughly 70% of silver that is mined is done so as a byproduct of mining other metals. Less than a quarter of silver comes from dedicated silver mines.
Silver occurs naturally in ores containing other metals such as copper, lead and gold. And with prices of industrial metals in the tank, less of these metals – and therefore silver – is being produced. According to the Silver Institute, silver output will fall 5% this year.
In effect, silver is really no more than an afterthought for most of the big miners. Even the world’s biggest producer of silver currently, Fresnillo (OTC: FNLPF), makes more money on the gold it mines than the silver.
The fact that silver is often just a byproduct is reflected in the fact that, since 2011, the rankings of the top five silver producers have not stayed the same.
Mining giant BHP Billiton (NYSE: BHP) thought so little of silver that it put one of the world’s largest silver mines – the Cannington silver mine in Australia into its South32 (OTC: SOUHY) spinoff.
So unless metals prices – and especially base metals – soar, supply of silver should remain constrained.
China and Silver
Another fundamental factor at play in silver’s price rise should not come as a surprise to anyone that invests in commodities – China.
China Construction Bank joined the LBMA (London Bullion Market Association) silver benchmark-setting process in March. That has resulted in the offering of Chinese renminbi silver futures contracts that can be settled in physical delivery of silver in London.
But even before that, Chinese investors had been piling into silver futures contracts traded on the Shanghai Futures Exchange.
But after Brexit, silver futures contracts in Shanghai saw several days of trading limit up on record volumes for that exchange.
Let’s not forget either that the Chinese government itself is adding to its reserves. In the first quarter of 2016, China bought 345.1 metric tons of silver, increasing its silver reserves by 175%. That’s not a surprise. China’s relationship with silver goes back to the Han Dynasty.
Where to Now for Silver?
My view is that silver heads even higher from here.
Silver producers are not hedging their production, which would put a cap on prices. That means producers think prices are going up for the foreseeable future. Compare this to the U.S. shale oil producers, which are hedging their output like mad.
Bank of America Merrill Lynch is jumping on the silver bandwagon too. It is forecasting silver to soar to $30 an ounce. In a report, it cited populism, migration and wealth distribution as causing further economic uncertainty globally.
Another bull on precious metals is bond guru Jeff Gundlach of Doubleline Capital. He points to troubles in the banking system, particularly in Europe. He told Reuters, “Banks are dying and policymakers don’t know what to do. Watch Deutsche Bank (NYSE: DB) shares go to single digits and people will start to panic.”
Silver ETFs
How should you play the continuing rise in the price of silver?
I like ETFs backed by physical silver. One example of silver ETFs is the ETFS Physical Silver ETF (NYSEArca: SIVR).
For a more daring, leveraged play on silver prices, the Global X Silver Miners ETF (NYSEArca: SIL) will give investors more bang for their buck.
Bottom line – the trend will be higher on these ETFs as long as the world’s central bankers continue their “mad” experiments in monetary policy.