Nearby COMEX silver futures settled at $24.04 per ounce on December 31, 2022, and posted a 2.95% gain last year. In Q1 2023, the metal settled slightly higher at the $24.156 level, up 0.46% for the three months. After the first three weeks of Q2 2023, silver probed above $26 per ounce and was at the $25.058 level on Friday, April 21.
The volatile silver futures market reached a pandemic-inspired bottom at $11.735 per ounce in March 2020, the lowest price since January 2009. Silver has not traded below $10 since December 2008. In February 2021, nearby silver futures prices reached $30.16, the highest since February 2013, before running out of upside steam. At $25 per ounce on April 21, silver has been in a bullish trend since September 2022, when the price reached a $17.32 per ounce low. In my Q1 2023 quarterly precious metals review on Barchart, I wrote, “In a world where asset prices have suffered from rising interest rates, inflation, and geopolitical turmoil, gold, silver, and platinum group metals could continue to offer a safe harbor for investors and traders over the coming months and years.”
The price action in silver in early Q2 could be forming a base for a move to challenge the 2011 and 1980 highs and critical technical resistance levels on either side of $50 per ounce. The ETMG Prime Junior Silver Miners ETF (SILJ) owns shares of the leading junior silver mining and exploration companies. If silver breaks out to the upside, SILJ could soar.
Silver is money
In around 600 B.C., the Lydians first used silver coins as currency. After the fall of the Roman Empire, many countries, including China, India, Bohemia, Great Britain, and even the United States, adopted a silver standard. President Lyndon Johnson signed the 1965 Coinage Act that eliminated silver coins because of a silver shortage.
While governments no longer hold silver as a reserve currency like gold, it remains a precious metal many individuals hold as a store of value.
Of the 1.4 billion kilograms of silver mined throughout history, half the silver no longer exists because of corrosion. Value is a matter of perception, worth, and usefulness. Silver represents wealth and value for many people worldwide, making it a hard currency and money.
The U.S. dollar is losing ground
The U.S. dollar and other fiat currencies derive value from the perception of full faith and credit in the governments that issue the legal tender. While governments, central banks, monetary authorities, and even supranational institutions own gold as part of foreign exchange reserves, few own silver as a reserve currency. However, individual silver holdings are ubiquitous.
Gold tends to gain during inflationary periods when the economic condition erodes the value of fiat currencies. Moreover, declining faith in governments because of increasing geopolitical tensions can boost gold’s value. Silver and gold have long had a correlated history. Silver’s lower per-ounce value encourages buying when gold rises, as it often outperforms gold on a percentage basis during rallies. Conversely, silver tends to fall more than gold on a percentage basis when prices decline. Therefore, speculators often flock to the silver market as bullish trends develop.
The U.S. dollar has been the world’s reserve currency since the end of WW II. The rise of China’s economy and the alliance between Beijing and Moscow has caused the dollar’s role in the global economy to decline. A weaker dollar in the worldwide financial landscape is a bullish factor for gold and silver. The leading precious metals tend to have an inverse relationship with the U.S. currency, rising when the dollar falls and declining when the dollar’s value increases. The current global landscape favors higher silver prices.
Silver’s industrial applications are increasing the demand
Silver has a myriad of industrial uses, including solder and brazing alloys, batteries, dentistry, glass coatings, LED chips, medicine, nuclear reactors, photography, photovoltaic (or solar) panels, RFID chips that track packages and worldwide shipments, semiconductors, touch screens, water purification, and many others.
In a recent press release, the Silver Institute reported that all leading silver demand categories rose to record highs in 2022, with total demand at 1.242 billion ounces, up 5% from the previous year. While demand increased, mine production declined to 822.4 million ounces, resulting in a 237.7-million-ounce market deficit. The Silver Institute forecasts the third consecutive deficit in 2023, with projected demand of 142.1 million ounces, with global silver inventories declining by 430.9 million ounces by the end of 2023.
Silver’s supply and demand fundamentals favor higher prices, but speculative and investor demand will drive the price over the coming months.
Levels to watch in the silver market
On December 31, 1999, silver was $5.413 per ounce. In 2001, the price dropped to just over $4 before taking off on the upside.
The long-term chart dating back to 1970 highlights silver’s two trips to the $50 per ounce level in 1980 and 2011. In 2011, the price made a slightly lower high. In 2023, silver fell below $20 only briefly, reaching $19.83 in March. The high in 2023 has been $25.95 per ounce, and the levels define silver’s technical short-term support and resistance levels.
Gold is trading around $2000 per ounce, about $70 under its all-time peak and technical resistance level. Silver’s significant upside hurdle is at the February 2021 high of just over $30 per ounce, and significant technical support is at the $17 level. Many market analysts believe gold is heading for a sustained rally to take the leading precious metal to new record highs. If correct, silver could follow with a furious rally.
The junior silver mining ETF is inexpensive at below $12 per share
Higher silver prices will encourage mining and exploration companies to increase their production and activities as rising prices allow for higher output costs. Mining companies tend to outperform silver on the upside and underperform when the price falls. Meanwhile, exploration companies, or junior miners, tend to provide even more leverage as they operate with more leverage. Each senior and junior mining company has idiosyncratic risks, including management, specific mines, and geographic locations. The two leading silver mining ETFs are the GX Silver Miners ETF (SIL), which owns shares of the senior mining companies, and the ETFMG Prime Junior Silver Miners ETF (SILJ), which owns shares of the junior mining and exploration companies. Both are liquid ETFs:
- At $30.31 per share, SIL had $1.037 billion in assets under management. SIL trades an average of nearly 550,000 shares daily and charges a 0.65% management fee.
- At $10.99 per share, SILJ had $742 million in assets under management. SILJ trades an average of over 1.32 million shares daily and charges a 0.69% management fee.
The last significant silver rally took the price of nearby COMEX futures from $11.735 in March 2020 to $29.53 five months later in August 2020, a 151.6% rise. Over the same period, SIL, the senior mining ETF, rose from $16.00 to $52.87 per share or 230.4%.
The chart illustrates SILJ’s rise from $4.84 to $17.21 per share or 255.6% over the same period.
While past performance never guarantees future price action, the silver mining ETFs will likely outperform silver’s price action if the metal breaks higher over the coming months. Junior mining shares and the SILJ could attract more speculative interest than senior miners and SIL because of leverage factors.
The ultimate silver target is the 1980 high at just over the $50 per ounce level. However, with gold heading to a new all-time peak, the prospects for silver are bullish. Bull markets can drive volatile commodities to illogical, irrational, and unreasonable prices on the upside. Silver’s supply and demand fundamentals, the overall trend over the past years, the decline of the dollar in the global financial system, and its penchant for volatility could mean the sky is the limit for the speculative precious metal.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
