Silver Miners ETF Is Trying To Shine

Silver is trading modestly higher, but the white metal's gains have been enough to spark a decent rally in some mining stocks.

The Global X Silver Miners ETF SIL is higher by 5.24 percent this year. That's a modest advantage over the largest gold miners exchange traded fund.

What Happened

After struggling to keep pace with gold and other precious metals last year, silver entered 2019 with expectations for a rebound. Some commodities market observers even speculated silver could be one of this year's leading metals plays. Although silver's price action remains somewhat lethargic, the white metal does have favorable demand dynamics at its back.

“Over the past five years, global demand for silver has exceeded supply. In 2017, demand outpaced supply by 810 tons,” according to Global X research. “If investments in silver bars and coins are excluded from the analysis, however, then the supply of silver continues to exceed demand. This implies that demand for silver as a store of value and an investment can dramatically swing prices, particularly given the volatile nature of such demand.”

Why It's Important

Volatility is an important consideration when investing in silver and silver miners. SIL's standard deviation of 42.2 percent is more than quadruple that of the S&P 500. The average market value of SIL's components is $2.39 billion, highlighting this ETF's status as mostly a small-cap fund.

SIL could benefit this year if the Federal Reserve slows its pace of interest rate hikes or, better yet, does not raise rates at all.

“Precious metals tend to become more desirable when interest rates are low, because the opportunity cost of holding a non-yield bearing asset class is lower,” said Global X. “However if interest rates rise sharply, it could put negative pressure on the metal’s price.”

What's Next

As is the case with gold miners, silver miners act as leveraged plays on the underlying metal, meaning SIL and its components need to silver prices to move higher to facilitate upside.

“Silver mining stocks can offer indirect exposure to silver prices,” said Global X. “These stocks tend to be leveraged plays on silver prices, owing to the high fixed costs of extracting the metal.”

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