The Best Way to Play Silver: The Metal That Is Outpacing Gold

by Sean Brodrick
gold and silver coins

Gold has had a great year. An incredible year, in fact. The yellow metal is up 20%!

But you would be amazed by how many financial professionals still don’t realize it. And never mind the asleep-on-their-feet general public. These folks are late to the party and still haven’t got a clue.

They aren’t just missing gold’s rally, either. Silver is having an even better year.

However, in this column, I’m not recommending you buy a chunk of silver. As I’ll show you, there’s something you can buy that’s even better.

First... how did we get here?

The Precious Metals Bull Marches On

Silver is up 23.5% from the start of the year. And this is in an environment that isn’t super-bullish.

By that, I mean we’re hearing that the economic slowdown in China won’t get better anytime soon. Remember, silver is an industrial metal as well as a precious metal. With China stuck in a lower gear, this drags on silver demand.

So why is silver doing so well?

I already told you here about how the gold-silver ratio has signaled a new bull market for precious metals.

I also explained how precious metals and miners are leaving the S&P 500 in the dust. This means performance-focused investors are piling into metals and miners. That’s sending prices higher, which attracts more investors.

But silver has some very specific things going for it as well.

Peak Silver

Output from silver mines peaked in 2015. This year, mine production is projected to fall 2.4% to 784.8 million ounces. This will mark the first decline in mine silver production since 2011.

And you can’t just “turn on” more silver mines. Mines take years to put into production. Also, about 70% of global output is byproduct production at zinc and lead mines. And a number of zinc and lead mines are closing this year.

Meanwhile, the silver market is already in deficit. That is, there is more demand than there is silver supplied. The difference is made up from stockpiles.

As you can see, last year marked the third year in a row of an annual deficit in the silver market.

051716_silver

The deficit hit 129.8 million ounces in 2015. That was more than 60% larger than 2014 - and the third largest on record.

Industrial Demand Is Rising

Despite the fact that China is dragging its feet like a kid on a trip to the dentist, worldwide industrial demand is still rising.

Silver is used in fabricating everything from jewelry and electronics to chemicals and solar panels. Heck, silver demand for photovoltaics (solar panels) rose 23% last year. It now accounts for 7% of total demand. That’s 77.6 million ounces.

To be sure, those panels get more efficient all the time. The amount of silver used in individual solar panels is falling by 5% to 6% per year. But at the same time, the overall market is growing by 20% per year.

051716_pvdemand

ETFs Are Loading Up

Exchange-traded funds that hold physical silver are buying with both hands. According to Bloomberg data, holdings are up 5.5% this year to 19,904 metric tons.

(At the same time, it’s worth noting that many ETFs are also loading up on gold. If you’re considering doing the same, just make sure to protect yourself from counterfeiters by following the steps I listed here.)

Falling Confidence in Central Banks

When it comes to interest rates, central banks in Europe and Japan have been in a “race to the bottom.” They are slashing rates to zero and even below zero, into negative territory. This is in a bid to boost global growth.

The world economy is growing, but very slowly. Now, investors around the world are starting to realize that the central banks will probably continue their ultra-low interest rate policy... at least through the end of the year.

Nobody has tried holding interest rates this low for this long. It’s uncharted territory. That scares people. And when people are scared, they buy silver and gold.

This all means that the big trends higher in silver and gold are likely to continue.

Crushing Stocks

In the first part of the year, gold led the way. But in mid-April, silver leapfrogged gold to become the best-performing precious metal.

But as I said, there’s a more profitable way to invest right now. That “even better” investment I mentioned earlier? I’m talking about miners.

Naturally, silver miners are outpacing gold miners. The Global X Silver Miners ETF (NYSE: SIL) is up 100% since January. At the same time, the VanEck Vectors Gold Miners ETF (NYSE: GDX) is up more than 80%.

All of these things - silver, gold and miners of both types - are leaving the S&P 500 in the dust.

Here’s how it all looks, year to date...

051716_metals

And there should be much more upside ahead.

How to Play It

An easy way to play this trend today is to buy the Global X Silver Miners ETF (NYSE: SIL). It holds 23 of the best silver producers in the world.

Its top holdings include Pan American Silver (Nasdaq: PAAS), Silver Wheaton (NYSE: SLW) and Fresnillo PLC. Fresnillo is a world-class producer, but it doesn’t even have a primary listing in the U.S. So the ETF gives you exposure to stocks you couldn’t buy otherwise.

The fund has a total expense ratio of 0.65%. And it is very liquid, with average volume over 2.9 million shares per day.

I think the best is yet to come for both silver and gold. You’ll want to make sure you are positioned to ride this trend.

Good investing,

Sean

Have thoughts on this article? Leave a comment below.

P.S. If you’re interested in learning about my three favorite gold investments - plus the ones I think you should avoid - be sure to pick up a copy of my new report, “The Savvy Investor’s Guide to Gold.” It’s available now in the Investment U Bookstore. Click here for details.

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