Precious metals have whipsawed wildly in recent months as sentiment towards investing in gold as well as silver has ebbed and flowed. While equities are performing strongly recently, hitting new highs, the case for investing in silver is gaining momentum, making it a superior investment to gold.
Now what?
You see, silver, unlike gold, possesses considerable utility and is widely used in range of industrial processes. Data from the Silver Institute shows that industrial fabrication was responsible for over 54% of all demand for physical silver in 2016.
That demand can only grow.
You see, silver is an essential element used in the production of components such as LCD touchscreens, electronic membranes, switches, capacitors, and printed circuit boards, which all form an integral part of modern electronic devices.
As demand for those devices rises, particularly as they form an important part of everyday modern life, it will cause industrial demand for silver to rise further.
Silver is also an essential ingredient used in the fabrication of the photovoltaic cells that make up solar panels. The significant growth in demand for solar energy triggered by moves to combat global warming by increasing the amount of energy generated through renewable sources will act as a powerful tailwind for silver. It is estimated that growing demand for solar energy alone will cause the volume of silver needed for use in the manufacture of photovoltaic cells to more than double from 2016 levels to be 15 million ounces by 2018.
What many investors don’t realize is that silver supplies remain constrained.
There has been a physical deficit of the white metal for the last four years, and this is expected to continue into 2017. Notably, that deficit could worsen as supplies decline; miners have been deferring investments in mine exploration and development because of the protracted slump in silver, which has seen it trading at under US$21 per ounce since mid-2014.
Already, the output of silver from the world’s fifth-largest producer Chile slumped by 32% year over year in May 2017, and a similar trend has been identified across other major producers, including Mexico, Peru, and Australia. This will cause supplies to decline further at a time when demand is rising, exacerbating the predicted shortage of silver which should drive prices higher.
So what?
One of the best means for taking advantage of the optimistic outlook for silver is by investing in primary silver miners rather than physical bullion or a silver ETF such as the iShares Silver Bullion ETF (TSX:EVR). This is because they provide investors with levered exposure to the white metal, giving them a “bigger bang” for every dollar invested.
One miner that stands out is First Majestic Silver Corp. (TSX:FR)(NYSE:AG). During the second quarter 2017, it produced 3.9 million ounces of silver, which represented a disappointing 20% decline year over year. That can be attributed to labour unrest among unionized workers and related work stoppages.
Nevertheless, the company appears to have a handle on those issues, and production should improve over the remainder of 2017. During the second quarter, 15,121 metres of underground development work was completed — an 11% increase over the first quarter.
For the first quarter 2017, First Majestic reported all-in sustaining costs of US$12.21 per ounce of silver produced — a 5% decrease year over year and well within the forecast range of US$11.96-12.88 per ounce for 2017. This means that as silver rises, First Majestic’s earnings will receive a healthy bump, which should cause its stock to appreciate.
