In one of our recent weekly updates, we provided reasons why gold has performed so well of late. A weakened US dollar, coupled with ‘real’ inflation-adjusted interest rates and government bond yields at low or negative levels, recently helped gold break $2,000 an ounce for the first time. However, it has not gone unnoticed that silver has also been on a good run and we feel that the reasons why are likely to continue for some time to come.
Like gold, silver has a reputation of being a ‘safe-haven’ and has also been profiting from the weaking dollar and lower real interest rates. Whilst silver has seen a steep rally since the spring, we are likely to see further dollar weakness and low bond yields for the foreseeable future and this is an environment which should see continued upside for silver and other precious metals.
We also feel that silver’s increasing use in key industrial processes is one of its real attractions. Currently around 40 per cent of silver is used in manufacturing processes and is often used by cutting edge industries such as medical equipment, electronics and water purification. However, its green credentials are making it attractive to a host of new investors. As the world focuses ever more intently on renewable sources of energy, the use of silver in the likes of solar panels and electrical vehicles could be a big driver of demand.
When the economic cycle picks up, silver tends to outperform. We saw evidence of that earlier this year when the reopening of economies and the policies put in place to see industry through this period coincided with a sharp recovery in the price of silver. Whilst we expect that the rate at which the global economy picks up will slow, we still expect to see above trend growth which should boost silver demand.
Despite silver’s strong run this year, the divergence between silver and gold is still at historic levels. Gold is up 60% over 10 years while silver is down 20%. Therefore, after carefully considering the investment case and reviewing commodities weightings within portfolios, we have recently added the iShares Physical Silver Exchange Traded Commodity Fund. We have largely funded the purchase by taking some profits from the exposure to gold.
The iShares Physical Silver Exchange Traded Commodity Fund is a large, low-cost and liquid fund which seeks to track the day-to-day movement of the price of silver, less fees, by holding silver bullion. The performance of the fund is strong versus its peers and one of its real appeals is that it provides a pure exposure to silver. We feel the fund has a place in the portfolio, not only for its diversification benefits, but also for its growth prospects.