The Easy Way To Add Silver Mining Exposure: Buy SIL

I own a number of silver miners as leverage to a possible silver shortage situation in 2023-24. I have been screaming at readers to buy some silver bullion and related miners since late summer, a function of tightening physical supply, investor apathy usually seen at major bottoms, and a standout valuation as one of the cheapest commodities to own. On top of this list of positives, only a limited advance from the record money printing to combat the COVID-19 pandemic means silver can be argued as “overdue” for a double or triple in price over coming years. My August article here on silver is a good primer explanation of the bullish argument, if you are new to precious metals investing.

Today’s article will focus on a single buy decision to add diversified silver mining exposure to your portfolio. The Global X Silver Miners ETF (NYSEARCA:SIL) is uniquely focused on North, Central, and South American silver companies, plus a variety of names traded outside the U.S. It has positions in many of the miners I personally own, in addition to a large number I do not. The advantages of this product are lower volatility and risk than buying a few of your favorite names, without giving up material upside potential.

Compared to two other ETF peers, ETFMG Prime Junior Silver Miners ETF (SILJ) and iShares MSCI Global Silver Miners (SLVP), Global X Silver Miners is the biggest measured by assets under management (at $1 billion). The 0.65% in annual fees to run the SIL ETF are similar to competing products, but again its liquidity for daily trading spreads, alongside ownership of leading foreign assets, sets it apart in my mind. Below is a 6-month chart lifting off the summer silver price low, contrasting total return performance by all three ETFs.

2023-24 Silver Shortage?

The primary and really only reason I am interested in Global X Silver Miners is my super-bullish outlook for silver this year. Physical shortages appeared in the pricing of retail silver coins right after the pandemic started in early 2020. Fear hoarding as the western world shut down its economy was the first knee-jerk reaction by small buyers. However, coin premiums have not come down as the economy reopened. If anything, premiums continued higher into late 2022 to the greatest spreads vs. the silver contained in each coin since the early 1980s (with a minor downtick in early 2023), pictured below.

The second part of the silver bull argument is large bullion inventories traded by banks, institutions, and modern ETFs have begun to fall dramatically over the last 12 months. In the futures and forward swap contract market, the implied lease rate picture has moved from a position of surplus in refined and registered silver bar trading in 2020 to a shortage setup in 2022. Many financial institutions liquidated inventories to raise capital in the pandemic’s early days, pushing overall lease rates into negative territory. Today, we find an inverted yield curve with spiking nominal rates, where 2-month borrowing costs are above 1-year and longer ones. The current lease rate setup is the most bullish in decades, from my experience trading precious metals since 1986. The January 2023 rate structure is telling us physical supply is much harder to find for big bullion orders.

Over the past decade, the strongest previous bullish lease rate setup was in early 2019, just before silver prices DOUBLED over 18 months. The January 2023 story is even more bullish!

Out of an estimated 2 billion ounces in easily found inventories at major exchanges, and through precious metals dealers, mining concerns, smelters/refiners, plus commercial users, better than 500 million ounces have disappeared over the last year. (Gold started to experience a similar shortage in inventories during 2022). Charts of both London and New York silver inventory trends are drawn below.

But there is more to the inventory story. For example, 35% of London vaulted silver bullion was held by ETFs in 2019. That ratio is now higher than 63% of the total! At current rates of investment demand for silver ETFs in brokerage portfolios and industrial demand outstripping newly mined supply (industrial uses representing about 50% of net yearly demand), above-ground stocks could be largely gone in 3-4 years. Then, the world will require enormous mining output increases (total mined supply is around 1 billion ounces annually), plus the melting of plenty of scrap/recycled metal from privately owned coins, jewelry, silverware, etc. to fill the gap in supply vs. rising demand. For either of these situations to occur, the silver price will have to climb substantially above its all-time high of US$50 an ounce. Industrial users could be left without supply, if huge incentives to find more silver do not appear soon (namely higher prices). Solar panels, EVs, and most all electronics need silver to function properly.

Anyway you slice it, if the dollar losses value in currency exchange markets from skyrocketing Treasury debt or another round of Federal Reserve money printing to save the economy from recession in 2023, investor demand for silver could really fly for this top monetary hedge. With around $60 billion in readily available above-ground inventory, it will not take much extra investor interest to send silver dramatically higher in price. For comparison, today’s silver above-ground inventory sum is equal to about 3% of the market capitalization of Apple (AAPL), the most valuable company in the world at $2.1 trillion now. Against $35 trillion in total U.S. equity market value, just a minor shift in investor capital out of stocks and into precious metals could potentially create mind-boggling price effects during an existing shortage.

Top 10 Holdings

For Global X, its Top 10 holdings include the leading silver royalty streaming company in Wheaton Precious Metals (WPM), the world’s largest metals smelter/refining business located in Asia, Korea Zinc Co., and miners operating all over the globe including a concentration in American hemisphere assets like Pan American Silver (PAAS), SSR Mining (SSRM), Industrias Penoles SAB de CV (OTCPK:IPOAF), Hecla Mining (HL), Fresnillo PLC (OTCPK:FNLPF), Buenaventura Mining ADR (BVN), First Majestic Silver (AG), and MAG Silver (MAG). Last week, the Top 10 represented roughly 76% of all SIL assets, with another 30 names accounting for 24% of net value.

Below is a chart comparing total return performance from SIL’s biggest holdings over the last six months, measured from the bottom in silver quotes. (Korea Zinc is not traded in the U.S.)

I have also drawn 1-year charts for all of the Top 10 below for readers to review. Notice that each of the individual investments is near the flatline for performance over the latest 12 months, meaning upside potential remains relatively untapped long term. The key (or catalyst) will be changing silver prices, especially the appearance of a strongly rising trend.

Final Thoughts

If you want silver exposure with leverage, miners are a great idea. If you are worried about picking the wrong individual miner that lags a sizable group move higher, why not buy a well-diversified and smartly structured ETF owning the whole industry? The best construction, with fair management costs and high levels of liquidity is the Global X Silver Miners fund.

The SIL trading chart doesn’t really jump out as a buy or sell using my momentum indicator formulas. However, this situation is relatively common for gold/silver mining ETFs around a major bottom. Few investors are usually paying attention or invested when silver is reversing into a powerful uptrend. In particular for the next bullish technical step, I am looking for better On Balance Volume readings into the spring to confirm a significant advance is under way.

What are the investment risks? The standout bearish outcome would follow any sizable drop in silver quotes. If my bullish view for silver proves wrong, substantial declines in value for SIL are possible. A serious global recession hurting industrial demand, and/or a strong U.S. dollar exchange rate could keep silver prices in check. Nevertheless, shrinking physical inventory levels alongside any increase in investor demand for silver may be able to override other negatives.

Historically, silver miners often rise or fall at 2x the percentage rate of change in underlying metal prices, particularly over 6-12 month time spans. If silver bullion falls -20% soon, I would expect SIL to decline -40%. Conversely, if silver rises +100% in 2023 to US$50 an ounce, SIL could climb +200% in price closer to $100 per unit (from $31 today). These numbers also represent my risk/reward calculations as worst-case and best-case scenarios this year.

My baseline forecast is silver will rise 40%+ to $35-40 an ounce by early 2024 (near my calculation of its long-term relative worth vs. money supply/debt growth and spreads in mining costs), to possibly $50 next year if a deep recession causes extended experimental money printing nuttiness beyond the pandemic mess. Depending on how the overall U.S. equity market performs, I am modeling a further SIL price gain of +60% to +120% over 12 months. Against downside potential of -40%, the bullish case is worthy of more research. I rate this leveraged-silver ETF a Buy.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.