Aberdeen Standard Physical Silver Shares ETF: A Suitable Melt-Up Candidate (SIVR)

“Every cloud has a silver lining.” – John Milton

2022 has been a year to forget for precious metal ETFs; if you look at the Aberdeen group’s stable of funds, offering exposure to physical precious metals, note that three out of the four precious categories have delivered negative returns, and the palladium option has only just about managed to eke out mid-single-digit gains.

One product, in particular, has had to take it on the chin, underperforming its peers by quite a large margin; the product in question is the Aberdeen Standard Physical Silver Shares ETF (NYSEARCA:SIVR), which is down by 20% on a YTD basis.

It also doesn’t help that at a time when investors have been increasingly cagey about exposing themselves to high-beta themes, SIVR’s volatility profile has gone through the roof.

All these factors would ostensibly make investors cautious about a product of this sort, but at the current price levels, I don’t think it’s the worst idea to make some room in your portfolio for silver, particularly when you consider some of the long-term tailwinds.

Unlike gold whose predominant role is to serve as a store of value, silver also has a much broader remit that enables it to be tapped by various industries. In fact, the Silver Institute estimates that 49% of silver demand comes from various industrial applications. Silver offers excellent ductility and can be easily molded without breaking. It is also one of the finest conductors of electricity as its electrons don’t face a lot of encumbrances whilst moving, relative to other elements.

This would make it one of the vital cogs in the production of solar panels (according to the Silver Institute, around 100mg of silver goes into making one solar cell, and one panel can have anything from 36 to 144 cells), whose prospects have only improved following the energy crisis in Europe. In a Lead-Lag Live Podcast episode released earlier this month, Alexander Stahel provided some interesting insights into the background there.

Last year, even before the Russia-Ukraine catalyst we saw this year, Europe had seen impressive growth of 34% in new solar PV capacity (~26GW). You’d like to think that the Russian-Ukraine fiasco will only speed up the adoption of solar capacity, particularly as solar power generation has enabled the Euro region to save up to EU 20bn cubic meters’ worth of gas imports between May and August this year. Incidentally, this year solar power generation contributed 12% of total power generation relative to a figure of 9% last year.

I think the market could be underestimating the potential influx of solar panels in regions such as Europe and I expect this to be a much more significant source of demand for silver over the next few years. Within various industrial applications, silver’s demand from the solar panel industry is expected to be the largest over the next 4 years, at close to 4550 tons. Also consider that the overall supply-demand balance is expected to move very favorably by 2025; mine supply will likely only grow by 1%, even as demand grows by 7%.

Silver’s ability to serve as a store of value may have been overshadowed by the ferocity with which rates have been raised. However, as noted in The Lead-Lag Report, the pace of change in the Fed Funds Rate this year has the potential to leave deep systemic scars, and I don’t believe one can rule out the prospect of Fed-induced recession which could boost the prospect of a quasi-safe haven such as silver.

Between the two main safe haven precious metals – gold and silver – the latter certainly appears to offer more favorable value at current levels, with the gold-silver ratio not too far away from hitting a channel boundary (the periods highlighted in red point to overextended periods) implying better prospects for silver.

It’s also worth noting that the dollar looks enormously overbought, relative to its long-term range, with the 14-period RSI on the monthly chart now at levels last seen in 2015. As mentioned in the ‘Leaders-Laggers’ section of The Lead-Lag Report, the current move looks unsustainable and we could see a breakdown soon enough. This would be another panacea for silver, the currency in which it is priced.

Conclusion

If you’ve kept abreast of my thoughts on the timeline of our report, you’d note that I’ve been recently highlighting the potential for a melt-up environment.

This year, investors have gotten wedged into this pessimistic loop, largely because they’ve been conditioned by the sequence of negative events and the relentless bearish narratives that have been reinforced for much of this year. However, if there’s one thing that I’ve learned during my time as a market observer, it is that every top and bottom in the market is characterized by significant bouts of overconfidence where the crowd thinks it knows it all.

My intermarket signals that encompass utilities, lumber, and treasuries suggest that a shift may be on the cards, and after a difficult 10 months, I believe this beaten-down silver-themed product could try and make up for lost time.