A Silver Safe-Haven: why demand remains robust

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15/04/2021

For centuries, the desirability of silver and gold has fluctuated with the fashion of the day and the changing political and economic environment. Safe-haven demand has been a steady drawcard, and the industrial uses of silver have added another dimension to its allure for well-informed investors.

But the global pandemic and a Reddit-powered army of small investors earlier this year have brought silver to a new legion of fans. This may have a lasting effect on demand.

 

The Reddit Army silver bullet

Silver experienced a surge in demand in late January when web-mobilised amateur investors piled into the precious metal to impact the price. They had already succeeded in inflating the price of several downtrodden stocks, including  US games retailer Gamestop. For a few days, silver surged, hitting eight-year highs before settling back to pandemic levels.

This Reddit-powered surge in price may have been short-lived, but there has been a long-lasting impact on interest and demand for silver. What has emerged since then is a relatively stable silver price but a much-widened retail buyer base.

 

Silver EFT’s

Amateur investors on Reddit were prompted to buy into silver via Exchange Traded Funds or ETFs. These are funds in which you can trade silver shares like a stock. The ETF targeted by these retail investors was the iShares Silver Trust (SLV). This ETF is backed by physical silver, and its holdings now are a lot higher than they were before the early February peak. This suggests that many of those who bought into the surge are sticking around.

 

Advantages of physical silver

Meanwhile, widespread media coverage and the price spike pushed up demand for physical silver as well. Over the last few months, The Pure Gold Company has seen clients take a greater allocation of silver; sometimes as an alternative to gold, other times in addition to it, for a variety of good reasons.

Silver provides the same safety and security advantages as gold. Both are seen as a safe-haven in the midst of uncertainty, both hold their value when other asset classes are losing theirs. Silver benefited from the extreme uncertainty during the height of the 2020 pandemic. It rose from a price range of £13-£14 an ounce before March 2020 to a high of over £22 at its peak in July 2020. Even though the price has tempered since then, silver has retained around a third of its gains.

Investors are also attracted by the tax advantage to be gained by silver investments. Like gold, certain silver coins, including the silver Britannia coin, is free from capital gains tax. If investors choose to have their silver stored in a vault outside the EU then it will remain VAT free as well.

When investors look to precious metals as a safe-haven, silver often rises alongside gold, but because of the relative price, the increase can be amplified. Silver more than doubled between its mid-March 2020 low and early August high. Gold in the same time frame rose 40%, although, like silver, it has since settled back, but remains higher than pre-pandemic levels.

Whilst it is accepted that silver is more volatile than gold, this is mitigated by the fact that silver performs well in times of uncertainty but also during economic growth where an increase in industrial demand increases demand for silver as a metal.

 

Industrial silver demand

This is a key differentiator between silver and gold. There has been a steady increase in applications that need silver for industrial processes or products, this now accounts for well over half of annual silver demand.

Silver is in use everywhere:-

  • Silver’s antibacterial qualities are used in many medical devices and procedures.
  • Silver’s conductivity is essential for semiconductors, RFID sensors, batteries, LED chips, electrical switches and almost every device in production today.
  • Silver can be found in batteries, solder and brazing alloys, photography and water purification systems.
  • Silver is used in solar panels has been pivotal in the growth of sustainable energy. Silver’s conductivity greatly improves the conversion of solar energy into electricity. It’s also low cost compared to other precious metals so it can be fabricated into cost-efficient panels.

The COVID-19 pandemic harmed this demand as many industries were forced to shut down amid global lockdown measures. Despite this drop in industrial demand, the safe-haven attraction of silver helped drive the silver price to new highs in July.

While the panicked rush to safe-haven investments has abated, there still remains a pallor of uncertainty. Countries still face second and third waves and new COVID strains which threaten to derail the return to economic stability.

Silver remains attractive for two reasons. It has both a safe-haven status and industrial demand. Both of these underpin silver’s popularity in times of economic hardship and economic growth. When growth returns, it will in part be fuelled by silver-enabled environmental commitments like solar panels and electric cars.

 

The historical price of silver

Silver’s relationship to gold is denoted in the gold/silver ratio. This is the amount of silver required to buy an ounce of gold. For many centuries from Roman times, the ratio had been around 12/1 but began to fluctuate in the 1900s.

Over the last 100 years, the ratio has been lower than 20 and higher than 100, shifting up and down on the back of rises and falls in both commodities’ price. When the gold/silver ratio is high, it is often taken as a good time to buy silver. It’s a sign that the silver metal is undervalued in relation to its pricier relative.

The ratio peaked at over 120 in March last year. Even the current ratio of around 70 is still historically high, and many analysts still expect silver to perform well. The 2021 London Bullion Market Association silver price forecasts a positive outlook for silver. Their analysts expect the price to rise 38% above the average 2020 price, and 8% above the early January 2021 price.

 

Short-term pique for long-term gain

The silver rush prompted by the Reddit investor army may have been only a short-lived surge, but it has had a lasting effect on retail silver demand. It has brought this modestly valued precious metal to the attention of new investors, helping keep demand and value elevated.

In summary, silver’s future value looks assured for many reasons.

  • Silver has a valuable safe-haven status in an uncertain post-Covid-19 world.
  • Silver has many industrial and environmental commercial uses, which further underpin its demand.
  • For investors, silver coins offer capital gains tax advantages.
  • Silver can also offer VAT exemption when stored in specific vaults.

In our opinion, the drivers of silver demand and potential future value are clearly here to stay.

 

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