Updated: Jan 27
WEquil Capital did a deep dive into Silver in late 2019 after Tesla started running up. We realized that solar and electric vehicles were likely to impact commodity markets so we placed some bets on Silver. We've had some exposure to Silver ever since to varying degrees. The reason why is that it is one of the few assets out there that can serve as a credible inflation hedge and has the added benefit of being integral to electrification. In this article we share the fundamental value proposition of Silver and why it is a top holding in our portfolio now and likely for years to come.
Silver is both an industrial and precious metal ... with the percent of production being around evenly split over the past few decades. Demand as a precious metal shifts more than demand as an industrial metal which is why it has such a high correlation with gold.
We published a tweet thread covering Silver from an investing perspective in May 2020. Everything about this thesis is as true today as it was then, except even more so because of inflation. Please read through this thread as it provides necessary background to understand the rest of this article.
Silver Industrial Uses
One great thing about WEquil Group is that we have a school full of innovators right next door. My daughters Sumay who created the school wrote a detailed paper about the industrial uses of Silver. Note how many of the biggest industrial uses are in growth industries tied to electrification. Her pseudonym was "Wilhelmina" at the time.
The most important industrial use in our view is solar. WEquil originally published this in late 2019, but republished it with better audio in 2020. The only thing that has changed is confirmation from the market that solar did in fact reach a tipping point as we predicted. What is not yet priced in according to our analysis is the impact that solar and electrification broadly will have on silver demand given the inelasticity of silver supply to prices.
In short...we think that Silver is one of the best long and short term plays on the market today. That's not the case for most everything else. As mentioned in our Inflation "Correlation Regime" thesis there is very little one can buy to truly hedge against inflation.
But why now?
Silver Market Timing
So far in 2022 the price of silver has pushed higher with a rise in interest rates. This is very atypical. The "Taper Tantrum" in 2013 sent gold and silver tanking. That's because there has been an inverse relationship between interest rates and precious metals since the creation of gold and silver ETFs in the early 2000s. That is changing in our new "Correlation Regime". Rates rose rapidly this past year and gold held up. So far 2022 has seen this shift in correlation accelerate because the driver behind higher rates was not economic growth by inflation, Fed reductions in QE, and the lack of global demand to buy up extreme deficit spending.
No we did not accidentally forget to crop the chart...we are leaving the announcement by the Fed that they are removing gold from their data series at the end of this month. What does that tell you?
Investing in silver during inflation regimes is a challenge. There is a real chance that the Federal Reserve and US government will try to restrict households from buying inflation hedges like silver, gold and crypto. If you think we are exaggerating this risk then go to the Federal Reserve Economic Data website and look up prices for gold and M2 money supply. Both are being removed by the end of next month.
Investors in the USA are not accustomed to risks like the government preventing investors from buying a commodity or a security. But as Ray Dalio from Bridgewater points out repeatedly in his enormous body of work...investing is challenging in part because the biggest risks are often those that have not happened before in our lifetimes. Bridgewater is the most successful hedge fund in the world for a reason...and Dalio see a good chance of these confiscations.
It will be harder for governments to restrict investors from owning Silver mining companies. These are shareholder rights to owning part of a company. Every silver company also produces other metals. In fact, one reason why silver is so sensitive to demand is that there are no pure play silver mining companies so even if the price runs up considerably its harder to justify the economics of expanding mining production unless other metal prices run up as well. In contrast, silver futures, silver ETFs, and silver coins can all be restricted from retail investors far more easily. Silver is so critical to the industrial production of so many goods that silver is also harder to restrict than gold which by comparison has very few practical uses.
Silver miners are a core holding. Here is what we are looking at for confirmation of a breakout on either side. If $SLV breaks down we will hold due to the fundamentals we listed in our article above. If we break up we would add to $SIL $SILJ $HL $AG.
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Joe McPhail, CFA, FRM
CEO of WEquil Group
Lead Portfolio Manager at WEquil Capital