There were claims mid-last year that precious metals had broken out of their protracted slump and entered a new bull market. Gold certainly didn’t disappoint, surging to US$1,364 per ounce in early July last year, its highest price in almost three years.
Nonetheless, while gold has firmed in recent weeks, silver has pulled back sharply creating an opportunity for investors to boost their exposure to silver.
Firstly, the value of silver is linked to gold and over the last few weeks the gap between gold and silver has widened considerably.
This relationship is reflected in the gold-to-silver ratio, which expresses how many ounces of silver are required to buy one ounce of gold. Currently, 74 ounces of silver are required to purchase one ounce of gold, indicating that silver is undervalued relative to gold, making now the time for investors to load up on the lustrous white metal.
Secondly, industrial demand for silver is expected to grow solidly over coming years.
Because of its conductive qualities, silver unlike gold is an important industrial metal.
In fact, industrial demand accounts for just over half of all the silver consumed, with it being an important element used in a wide variety of applications. These include the manufacturing of electronic components for use in hi-tech devises such as laptops, cell phones and tablets, the fabrication of solar panels, alloys and solders.
The improving outlook for the global economy coupled with strong demand for solar panels, particularly from China’s industrial demand for silver can only increase.
Finally, silver supplies are falling.
The long-term bear market in silver which saw its price drop below the cost of production for many miners caused investment in exploration and mine development to decline sharply. This is evident from the silver market posting its fourth consecutive supply deficit in 2016.
There was a 52 million ounce shortfall in supply of physical silver and while deficits typically have little effect on prices in the near-term, regular annual deficits can certainly apply upward pressure to prices. This is especially the case if inventories and production are falling as has been occurring of late.
While larger miners and silver streaming companies tend to be the favoured fare among precious metals investors it is the smaller more speculative miners that offer the greatest potential return. One that stands out is small-cap Silvercorp Metals Inc. (TSX:SVM)(NYSE:SVM) which is the largest primary silver miner in China and has nearly 114 million ounces of silver reserves.
Not only has it been able to steadily grow production but ore grades are improving. This along with significant cost cutting efforts saw all-in sustaining costs for the nine months ending 31 December 2016 fall to US$3.96 per ounce or close to a third of where they were a year earlier.
For these reasons Silvercorp reported some impressive numbers for that period; net profit almost quadrupled year over year and cash from operations tripled.
Impressively, Silvercorp has forecast that 2017 production will rise by a massive 22% compared to 2016 and this coupled with the marked reduction in costs bodes well for increased profitability and a solid bump in earnings, particularly as silver rises.
Even more outstanding is that for a small-cap miner operating in what is a capital intensive industry Silvercorp has no long-term debt and was holding almost US$67 million of cash on hand at the end of December 2016. This reduces the degree of risk associated with investing in the miner and along with the factors discussed earlier makes it one of the best means of gaining exposure to silver.
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Fool contributor Matt Smith has no position in any stocks mentioned.