Silver Prices Surging – How Market Conditions Are Affecting The Price Of Silver

Precious metal prices are significantly influenced by investor sentiment, much like stocks and bonds. This can lead to routine price fluctuations, sometimes large and erratic, where the volatility can create both challenges and opportunities for investors. 

A comparison of price movements in gold (represented by the SPDR Gold Shares ETF GLD) and silver (represented by the Silver Benchmark Index SGICSIB) since last May reveals two key insights.

First, gold and silver prices are closely correlated. Second, silver prices exhibit greater volatility than gold prices, with more pronounced price swings in both directions. While daily price swings can be unnerving for investors, they can also create trading opportunities, offering the potential for higher returns for investors that are aware of the volatility.

The above chart shows that gold and silver prices are closely, but imperfectly, correlated. It also demonstrates that silver prices are more volatile than gold prices.

A Hedge Against Uncertainty And Inflation

Precious metals have long been viewed as a hedge against inflation and used to preserve wealth during times of economic or geopolitical instability. History has demonstrated the correlation, with gold and silver prices often surging in response to crises and turmoil. The price of gold doubled in less than five years from $272/oz in August 2001 to $549/oz in January 2006 following the September 11th terrorist attacks. Similarly, gold rallied during and after the 2008 global financial crisis, and most recently, the Israel-Hamas war has exacerbated geopolitical tension, further driving up demand for the yellow metal.

Silver has also historically offered advantages even during economic uncertainties. According to the Silver Institute, when markets go into "risk off" mode (i.e., decline), silver is seen as a relatively safe and inexpensive investment that has typically delivered positive returns. Yet under "normal" circumstances of economic expansion, silver exhibits a positive correlation with stock market performance as reflected in its relationship with indices such as the S&P500. This demonstrates the metal's dual nature, as industrial consumption accounts for more than half of the silver demand, according to the World Silver Survey 2023.

Surging Industrial Demand for Silver

The transition towards a more sustainable future and the growth of clean energy technologies have positioned silver as a critical component in numerous industries. Sectors such as electric vehicles, green energy infrastructure, and consumer electronics, all rely heavily on silver for its unique properties and applications. 

The increasing adoption of electric vehicles and the expansion of charging infrastructure will further drive the demand for silver, as it plays a crucial role in the manufacturing of batteries and electrical components.

Furthermore, photovoltaic cells, used in solar panels, require significant amounts of silver for their efficient operation. Additionally, silver’s exceptional electrical conductivity and durability make it an essential material in the production of wind turbines and other renewable energy systems.

The continued growth of these industries could boost demand and support higher silver prices. This positions silver as an attractive investment opportunity, especially given its historical performance as a hedge against inflation and economic uncertainties 

While the demand for silver is expected to surge, the supply side may struggle to keep pace. According to Sprott, a global investment manager specializing in precious metals, "supply will not keep up with growing demand as we do not see enough projects in development to generate the kind of production levels in question". 

Investors looking to capitalize on that potential upside in silver prices may want to consider mining companies that offer significant silver exposure. These companies, which are directly involved in the exploration, extraction, and production of silver, can provide a direct avenue for investors to gain exposure to the underlying commodity.

What Are Some Investment Plays In Silver?

Silvercorp Metals Inc. SVM

Vancouver, Canada-based Silvercorp Metals Inc. SVM is a silver producer with an 18-year track record of profitable operations and consistent growth. In its most recent quarter, silver accounted for 59% of total revenue — one of the highest among its peer group of silver miners. 

In fiscal year 2023, Silvercorp produced 6.6 million ounces of silver at an all-in sustaining (AISC) cost of $9.73/oz, net of by-products. This low production cost translates into industry-leading profit margins, enabling the company to build a strong balance sheet with approximately $198 million in cash (and no debt) without external financing. While Silvercorp’s single-jurisdictional focus has led to undervaluation in the current market, the company is exploring strategic acquisitions to broaden its scope and address this perception.

In April, Silvercorp announced a friendly deal to acquire Adventus Mining Corp. ADVZF in an all-stock transaction worth around $146 million. Adventus' flagship asset is the permitted, high-grade El Domo copper-gold project in Ecuador. This acquisition offers a potential for re-rating, driven by increased scale, a significantly enhanced growth profile, and the establishment of a presence in an emerging, mining-friendly jurisdiction.

Pan American Silver Corp. PAAS

Pan American Silver Corp. PAAS operates silver and gold mines in North, Central and South America. The company is one of the largest silver producers globally but has a high AISC profile almost twice that of Silvercorp. 

Pan American is actively divesting its non-core assets. Recently, the company agreed to sell its La Arena project in Peru to Zijin Mining. The deal includes an upfront cash payment of $245 million and a $50 million future contingent payment.

New Pacific Metals Corp. (AMEX :NEWP)

New Pacific Metals Corp. NEWP may be a more speculative play as a development-stage company than the other established silver producers. However, New Pacific owns promising mineral assets in Bolivia, and its flagship Silver Sand project is ranked among the top undeveloped silver projects in the world. In 2023, a Preliminary Economic Assessment (PEA) outlined a post-tax Net Present Value (5% discount) of $726 million and an Internal Rate of Return of 39%.

Their other project, Carangas, could be even bigger, with a PEA expected to be released later this year, further cementing the company's value. As of Mar. 31, this year, New Pacific had around $25 million in working capital, providing ample resources to continue advancing their projects.

Investors in exploration companies can realize substantial returns once the market recognizes the value of the project or if they are acquired by larger players. Other industry peers have shown interest in New Pacific as the company is backed by both Silvercorp (which owns a 27% stake) and Pan American, the latter of which recently increased its stake to 12%.”

Endeavour Silver Corp. EXK

Endeavour Silver Corp EXK is an established silver miner with operations in the United States, Mexico and Chile. In 2023, the company produced 5.6 million ounces of silver at an AISC of US$22.93/oz net of by-products, with silver accounting for more than half of the revenue mix.

As the global economy navigates through uncertainties and potential headwinds, precious metals may continue to shine as a compelling investment opportunity. By understanding the economic drivers and market sentiment influencing these commodities, investors can position themselves to capitalize on the potential upside while mitigating risks through diversification.

Featured photo by Geizkragen69 on Pixabay.

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