Silver, Explained

Silver often flies under the radar of its metal counterpart, gold, but silver has unique properties that make it attractive as both a precious and an industrial metal. The following analysis seeks to shed additional light on silver by answering five key questions:

• How and where is silver extracted?
• How is silver used?
• How does silver compare to gold?
• What are silver’s supply and demand dynamics?
• What are the differences between investing in physical silver, futures, and silver mining stocks?

How and Where Is Silver Extracted?

Silver ore is mined through both open-pit and underground methods. The open pit method involves using heavy machinery to mine deposits relatively near the Earth’s surface. In underground mining, tunnelling deep shafts into the ground allows for the extraction of the ore. With extraction completed, the ores are crushed, ground, and then separated through a process called “flotation” to achieve mineral concentrations 30-40

More than 3.5 billion people currently experience water scarcity, and 10% of the global population lives in countries that the United Nations considers to have high or critical levels of water scarcity.^1,2 In addition to representing a grave health concern, limited access to clean water disrupts segments ranging from agricultural production to hydroelectric generation to semiconductor manufacturing. Unfortunately, water shortages are expected to proliferate, with as many as 5 billion people forecasted to experience water scarcity by 2050.³ However, companies are working to improve the water cycle and promote more thoughtful approaches to our precious water resources.

In this piece, we highlight four companies in the Global X Clean Water ETF (AQWA) that could help optimize water use or otherwise mitigate future shortages.

• Xylem: Offers a wide array of optimization solutions for water transportation and treatment
• Mueller Water Products: Manufactures water distribution and measurement products
• Ecolab: Develops technology and services for water treatment and purification
• Energy Recovery: Produces equipment used in the desalination process

Xylem: Using Every Drop of Water

Fundamental vulnerabilities in how clean water and wastewater are transported result in needless water loss. Leaky distribution pipes are difficult to detect quickly and can result in significant volumes of lost water if left unattended. This issue is so prominent in North America that an estimated 20–50% of water is lost in distribution.⁴ Globally, there is a roughly 30% disparity between the volume of water utilities deliver and the amount of water billed. According to the World Bank, the water lost costs the global economy $14 billion annually.⁵

Antiquated wastewater management systems can also compromise clean water supplies, particularly those that are not calibrated for climate change. Consequently, system operators often have little ability to prevent disruption when sudden weather events wreak havoc on facilities. Sewage overflows are common after flooding or heavy precipitation events, resulting in contaminated water supplies. Last year, storm overflows in the United Kingdom dumped raw sewage into rivers and seas about 373,000 times.⁶

To improve water management, Xylem Inc. deploys smart water innovations that use sensors, automation, and data analysis. Its virtual district metering areas (vDMAs) interpret information from flow meters to detect when leaks occur. In Park City, Utah, Xylem’s VDMA services reduced leaks by 10%.⁷ The vDMA framework merged acoustic, pressure, and flow rate data to identify three times the amount of water loss than was previously known.⁸

In another case, Xylem leveraged digital monitoring in South Bend, Indiana to reduce sewer overflows by 70%.⁹ Internet of Things (IoT) analytics informed better decision-making during storms and allowed system operators to pre-emptively clean sewage blockages. Besides water savings, the system reduced E. coli concentrations in a local river by 50%.¹⁰

Utilities around the world are embracing smart water technologies to boost efficiency and water savings. Water utility spending on digital technologies could increase at a compound annual growth rate (CAGR) of 9% between 2020 and 2025, compared to a 3% CAGR for all other spending.¹¹ Accordingly, Xylem aims to derive 50% of total revenues from digital products and services by 2025, up from 35% in 2021.¹² Further adoption of digital water equipment could act as margin catalyst for Xylem, as digitally augmented gear and accompanying service contracts are often more profitable than other business lines.

Mueller Water Products: Upgrading Decrepit Water Infrastructure

Another avenue to save water could be to upgrade aging infrastructure. In the United States, 6 billion gallons are lost annually due to leaky pipes, amounting to $7.6 billion in losses in 2019.¹³ Dated infrastructure can also be dangerous because it preserves obsolete design practices. As many as 22 million Americans still drink water delivered by lead pipes, even though lead pipes were outlawed for use in the country’s public water systems in 1986.^14,15

The now infamous Flint, Michigan water crisis highlighted such an oversight, as close to 100,000 residents were exposed to lead-contaminated drinking water.¹⁶ Severe outcomes ranging from hair loss to birth complications in Flint demonstrate the importance of protecting populations from the design flaws of the past.^17,18 To date, the city has replaced more than 90% of relevant lead pipes and could complete this process by September 2022.^19,20

The recently passed Infrastructure Investment and Jobs Act (IIJA) directs $55 billion over five years toward various water initiatives in the United States and addresses outdated water infrastructure.²¹ One of the largest water-related line items in the bill is $15 billion to remove and replace lead pipes, which is enough to eliminate an estimated 25% of the lead pipes in the United States.²²

We expect IIJA investments to potentially boost demand for water distribution and control equipment. As local governments replace lead pipeline systems, they will need more than just new pipes. Mueller Water Products is a company that specializes in flow control equipment in North American markets, with over 90% of revenues derived from the United States.²³  Relevant products include iron gates, service brass products, pipe repair components, and specialty valves to control water pressure in pipelines. The company is also establishing a new brass foundry designed to forge components made from lead-free brass alloys. This foundry, which is set to begin operations in 2023, could help the company distinguish itself as a manufacturer of safely sourced water equipment.²⁴ This focus on U.S. markets and key offerings may position the Mueller Water Products to support some of the water initiatives set forth by the IIJA.

Ecolab: Boosting Global Water Hygiene

Further development of water sanitation systems could facilitate the safe reuse of water, effectively boosting supplies. At least 2 billion people lack access to safely managed drinking water, and only about half of the world’s population use safely managed sanitation services.^25,26 Current sanitation systems offer even less coverage than these metrics might suggest. Globally, 80% of wastewater flows back into the environment without being treated or reused, putting billions at risk of diseases such as cholera, dysentery, typhoid, and polio.²⁷ Besides pathogens, wastewater often contains contaminants such as phosphorous, nitrogen, and industrial metals.

Sanitation coverage has improved in recent decades, with 74% of the world’s population having access to safely managed drinking water as of 2020, compared to 62% in 2000.²⁸ Still, sanitation improvement remains a slow and uneven process. In 2020, only 29% of people living in countries the World Health Organization (WHO) classified as low-income had access to clean drinking water facilities.²⁹

Water purification companies with broad global footprints, such as Ecolab, could prove instrumental in building out wastewater treatment efforts on the industrial side. Ecolab maintains a global presence, providing water treatment equipment, chemicals, and consulting services in more than 170 countries.³⁰ The company’s offerings include chemicals and coagulants, primary wastewater treatment, osmosis membranes, dewatering chemicals, household filters. See our piece, Introducing the Global X Clean Water ETF (AQWA), for an overview of the wastewater treatment process. The company also caters its sanitation expertise toward industries such as food service, hospitality, healthcare, chemical processing, minerals, and power generation.

A diverse business model has allowed Ecolab to accommodate a wide array of needs within the clean water space. In addition to organic growth and continued acquisition activity, the company could find opportunity serving the expanded needs of pre-existing customers. Wastewater treatment is a complex process that often can be improved upon at multiple points. Ecolab’s integration allows the company to address multiple needs from the same customer, which can lead to repeat revenue streams. Growing corporate emphasis on sustainability could also act as a tailwind. Ecolab focuses on boosting the efficiency of sanitation processes, an attractive prospect for companies who are likely to pursue incentives for reducing their energy and water footprints. Thanks to efforts to diversify and expand its offerings, Ecolab is estimated to serve a potential market of $150 billion worldwide, up from $100 billion in 2011.^31,32

Energy Recovery: Sourcing Drinking Water from the Ocean

Another strategy to improve water supplies is to simply source more of it. Desalination is a process that removes salt and other minerals from seawater or brackish groundwater and converts it to fresh water. Although the desalination industry remains in its early stages, it is a technology deployed at scale that already provides clean water to more than 300 million people globally.³³ Further adoption of desalination could tap into the 97.2% of the world’s water that is contained in the ocean and greatly expand the amount of freshwater available.³⁴ Besides bolstering water supplies, desalination could protect against some of the impacts of climate change. Rising ocean levels are expected to permeate into aquifers and coastal freshwater sources, in some cases rendering these resources undrinkable.³⁵

Energy Recovery provides equipment meant to bolster efficiencies of industrial fluid-flow markets worldwide, with a primary focus on reverse osmosis seawater desalination. Energy Recovery’s product suite includes pumping systems, turbochargers, and pressure exchangers for desalination plants. Such products specifically seek to mitigate one of the biggest issues with desalination: high energy intensity. Energy use accounts for 50-60% of total desalination costs, thus power conservation could decrease costs and encourage adoption of the technology.³⁶ In 2020, the company’s line of pressure exchange devices saved desalination customers $2.6 billion in energy costs and avoided 12.5 million metric tons of carbon emissions.³⁷ On a facility basis, pressure exchangers can reduce energy use by 60%.³⁸

Conclusion

The increasing impact of water scarcity and the threat of further shortages cannot be ignored. Water is essential to life and a basic human right, never mind its role as an economic cornerstone. Fortunately, the private sector continues to innovate in areas such as smart water optimization, infrastructure replacement, advanced water purification, and water sourcing. In our view, companies in these spaces, like Xylem, Mueller, Ecolab, and Energy Recovery, could potentially benefit as the world increases its investments in strategies designed to avoid the worst water shortage outcomes. 

Related ETFs

 

AQWA: The Global X Clean Water ETF seeks to invest in companies advancing the provision of clean water through industrial water treatment, storage and distribution infrastructure, as well as purification and efficiency strategies, among other activities.

Click the fund name above to view the fund’s current holdings. Holdings subject to change. Current and future holdings subject to risk.

1. UNESCO World Water Assessment Programme. (2021, March 21). The United Nations world water development report 2021: Valuing water. United Nations Educational, Scientific and Cultural Organization. https://unesdoc.unesco.org/ark:/48223/pf0000375724
2. Food and Agriculture Organization of the United Nations & United Nations Water. (2021). Progress on level of water stress: Global status and acceleration needs for SDG indicator 6.4.2. Rome. https://doi.org/10.4060/cb6241en
3. Samel, M. (2022, February 17). Global water agenda: What to expect in 2022. Economist Impact. https://impact.economist.com/sustainability/ecosystems-resources/global-water-agenda-what-to-expect-in-2022
4. Alawadhi, A., & Tartakovsky, D. M. (2020, February 12). Bayesian update and method of distributions: Application to leak detection in transmission mains. Water Resources Research, 56(2), 1-10. https://doi.org/10.1029/2019WR025879
5. Xylem. (2021, September 9). Optimizing leak detection with a virtual DMA: Progressive utilities are leveraging technology to improve the economics of water management [White paper]. https://www.xylem.com/siteassets/support/white-papers/white-paper-resources/wp_optimizingleakdetection_0921.pdf
6. Wilcock, D. (2022, March 31). Raw sewage was dumped into English rivers and seas 372,533 times last year and taxpayers will pick up bill as ageing sewer systems struggle to cope with population growth and more extreme weather. The Daily Mail. https://www.dailymail.co.uk/news/article-10673021/Raw-sewage-dumped-English-waters-372-533-times-2021-figures-show.html
7. Xylem. (n.d.). Park city reduces water loss by 10% using leak detection and pressure monitoring [White paper]. Accessed on June 2, 2022 from https://www.xylem.com/en-us/support/case-studies-white-papers/park-city-utah-reduces-water-loss-ten-percent-using-leak-detection-and-pressure-monitoring/
8. Ibid.
9. Ruggaber, T., & Fahey, K. (2021, January 26). How the city of South Bend saved $400m and reduced CSOs by 70% [Webinar]. https://www.xylem.com/en-us/about-xylem/newsroom/events/webinar-how-the-city-of-south-bend-saved-$400m-and-reduced-csos-by-70/
10. Ibid.
11. Latino, M., Hackett, G., & Pilla, M. (2021, September 30). Xylem: 2021 investor day. Xylem. https://xyleminc.gcs-web.com/static-files/f705f8b0-7c6e-4af8-bdee-2e90fcb7d7c2
12. Ibid.
13. ASCE Members & Staff. (2021). A comprehensive assessment of America’s infrastructure. American Society of Civil Engineers. https://infrastructurereportcard.org/wp-content/uploads/2020/12/National_IRC_2021-report.pdf
14. Environmental Protection Agency. (2022, April 27). Use of lead free pipes, fittings, fixtures, solder, and flux for drinking water. https://www.epa.gov/sdwa/use-lead-free-pipes-fittings-fixtures-solder-and-flux-drinking-water
15. Rosenthal, L., & Craft, W. (2020, May 4). Buried lead: How the EPA has left Americans exposed to lead in drinking water. APM Reports. https://www.apmreports.org/story/2020/05/04/epa-lead-pipes-drinking-water
16. Miettinen, D. (2022, April 27). Looking back at the Flint water crisis, eight years on. Marketplace. https://www.marketplace.org/2022/04/27/looking-back-at-the-flint-water-crisis-eight-years-on/
17. Dean, J. (2021, April 15). Water crisis took toll on Flint adults’ physical, mental health. Cornell Chronicle. https://news.cornell.edu/stories/2021/04/water-crisis-took-toll-flint-adults-physical-mental-health
18. Kristofferson, M. (2021, October 19). Flint water crisis worsened birth outcomes, disproportionally affected black babies, YSPH study finds. Yale School of Public Health. https://ysph.yale.edu/news-article/flint-water-crisis-worsened-birth-outcomes-disproportionally-affected-black-babies-ysph-study-finds/
19. Walton, B. (2022, May 2). After decades of neglect, bill coming due for Michigan’s water infrastructure. Michigan Radio. https://www.michiganradio.org/environment-climate-change/2022-05-02/after-decades-of-neglect-bill-coming-due-for-michigans-water-infrastructure
20. Borowy, S., & Bleu, R. (2022, April 14). Flint extends deadline to replace lead pipes by September 2022. WNEM. https://www.wnem.com/2022/04/14/flint-extends-deadline-replace-lead-pipes-by-september-2022/
21. Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, 135 Stat. 429 (2021). https://www.congress.gov/117/plaws/publ58/PLAW-117publ58.pdf
22. Ibid.
23. Mueller Water Products, Inc. (2021, September 30). Form 10-K. United States Securities and Exchange Commission. Retrieved from http://otp.investis.com/clients/us/mueller_water_products/SEC/sec-show.aspx?FilingId=15367987&Cik=0001350593&Type=PDF&hasPdf=1
24. Mueller Water Products, Inc. (2022, May 2). Mueller Water Products reports 2022 second quarter results. Seeking Alpha. https://seekingalpha.com/pr/18773958-mueller-water-products-reports-2022-second-quarter-results
25. World Health Organization. (2022, March 21). Drinking-water. https://www.who.int/news-room/fact-sheets/detail/drinking-water
26. World Health Organization. (2022, March 21). https://www.who.int/news-room/fact-sheets/detail/sanitation
27. United Nations Water. (n.d.). Water quality and wastewater. Accessed on June 2, 2022 from https://www.unwater.org/water-facts/quality-and-wastewater/
28. Ritchie, H., & Roser, M. (2021, June). Clean water. Our World in Data. https://ourworldindata.org/clean-water-sanitation
29. Ibid.
30. Ecolab. (n.d.). About Ecolab. Accessed on June 2, 2022 from https://www.ecolab.com/about
31. Ecolab. (2022, January). Impacting what matters: 2021 annual report. https://s24.q4cdn.com/931105847/files/doc_financials/2021/ar/Annual-Report-2021.pdf
32. Ecolab. (2012, February). Working as one: Annual report 2011. https://s24.q4cdn.com/931105847/files/doc_financials/annual/2011-annual-report.pdf
33. Robbins, J. (2019, June 11). As water scarcity increases, desalination plants are on the rise. Yale Environment 360, Yale School of the Environment. https://e360.yale.edu/features/as-water-scarcity-increases-desalination-plants-are-on-the-rise
34. Mullen, K. (d.). Information on Earth’s water. National Ground Water Association. Accessed on June 2, 2022 from https://www.ngwa.org/what-is-groundwater/About-groundwater/information-on-earths-water
35. Climate Hubs. (d.). Saltwater intrusion and salinization on coastal forests and farms. U.S. Department of Agriculture. Accessed on June 2, 2022 from https://www.climatehubs.usda.gov/hubs/southeast/topic/saltwater-intrusion-and-salinization-coastal-forests-and-farms
36. Zarzo, D., Prats, D. (2018, February 1). Desalination and energy consumption. What can we expect in the near future? Desalination, 427, 1-9. https://doi.org/10.1016/j.desal.2017.10.046
37. Energy Recovery. (d.). Scalable solutions for global desalination. Accessed on June 2, 2022 from https://energyrecovery.com/water/
38. Energy Recovery. (n.d.). PX^® Pressure Exchanger^®: Best-in-class energy recovery. Accessed on 2, June 2022 from https://energyrecovery.com/water/px-pressure-exchanger/

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times higher than natural occurrences. Refiners then further concentrate this extraction through the process of electrolysis or amalgamation.¹

Only 27% of silver derives from mining activities where silver comprises the primary source of revenue. The remaining 73% comes from projects where silver is a by-product of mining other metals, such as copper, lead, and zinc.² As expected, the revenues of firms focused on primary silver production tend to be much more impacted by silver prices than firms that produce it as a by-product.

Silver can be found across many geographies, but approximately 56% of the world’s silver production is found in the Americas, with Mexico, Peru, and Chile supplying 43%.³ Outside of the Americas, China, Australia, and Russia combine to make up nearly 25% of the world’s production.

How Is Silver Used?

For centuries, silver has been used in a variety of luxury goods, such as jewelry, tableware, and fine art. Many buyers look favorably upon the durable nature of silver and its collectability aspect. Today, over 40% of silver’s consumption stems from this pocket of the market, including jewelry and silverware.⁴ Silver is a significant material for industrial uses as well, due to its thermo-electro conductivity, ductility, malleability, and high sensitivity to light. The metal is used extensively in a variety of faster-growing electronics segments, such as solar panels, LED lighting, flexible displays, touch screens, RFID tags, cellular technology, and water purification. Silver’s unique properties, as well as the relatively small quantities of the metal required in many applications, often make it an irreplaceable input, even if the price of silver rises.⁵

How Does Silver Compare to Gold?

Silver and gold are often compared to each other, given their common classification as precious metals. Note two important differences between them: Silver’s additional industrial usage and their relative market sizes.

Industrial Usage: As discussed in the section above, industrial usage of silver accounts for about 58% of its annual demand. Gold, by comparison, has only about 8% of its demand driven by industrial use, with the rest attributed to jewelry and gold bars.^6,7 This difference means that gold is more purely a precious metal, whereas silver and its price is impacted by both demand for precious metals, as well as industrial demand.

Market Size: The market for gold is enormous, with its total value exceeding that of the European sovereign debt market. The market for silver, however, is much smaller and tends to be more volatile. The silver market is one-tenth the size of gold’s in London’s wholesale dealing and one-fifth the size of gold’s COMEX futures.^8,9

The Gold-Silver Ratio: The gold-to-silver ratio is a commonly cited figure that represents the amount of silver required to purchase one ounce of gold. This ratio tracks the prices of these metals relative to each other and can indicate when one is potentially cheaper or more expensive than usual. Over the last 30 years, this ratio has been at an average of 65. Currently the ratio is near 78, which possibly indicates that silver is undervalued relative to gold.

What Are Silver’s Supply and Demand Dynamics?

Over the past five years, global demand for silver has remained aligned with global supply. In 2021, supply outpaced demand by only 23 ounces.¹⁰ If investments in silver bars and coins are excluded from the analysis, however, then the supply of silver exceeded demand.¹¹ 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. Therefore, if owning precious metals becomes more attractive to investors, then silver prices could rally significantly. However, if interest rates rise sharply, it could put negative pressure on the metal’s price. In addition, precious metals are often sought after when volatility is high, as investors seek investments that can potentially preserve their value even in a bear market.

One trend that has the potential to dramatically change silver’s supply and demand landscape involves increased solar power installations. It is estimated that each gigawatt (GW) of installed solar power requires 30 metric tons of silver.¹² Given its high electrical and thermal conductivity, a silver paste is used in roughly 85% of photovoltaic cells.¹³ In 2020, new solar installations amounted to 138 GW, with solar representing approximately 9% of silver’s total demand.^14,15 However, analysts estimate that 2023 could witness 236 GW of new solar capacity, representing 11% of total expected silver demand.¹⁶

What Are the Differences Between Investing in Physical Silver, Futures, and Silver Mining Stocks?

5

Physical Silver: Silver bullion can be bought directly from precious metal dealers, who sell it at spot market prices. The advantage of physical ownership is that its value closely tracks the price movements of the broader silver market. This also allows owners to potentially physically possess the metal, giving them direct access to their investment. One downside is that dealers can charge premiums to buy and sell silver, which can dramatically reduce returns. In addition, there can be costs of storage, such as buying a safe or renting a safety deposit box. Moreover, when an investor sells physical silver, gains are currently taxed at a maximum of 28%.

Silver Mining Stocks: Silver mining stocks can offer indirect exposure to silver prices. These stocks tend to be leveraged plays on silver prices, owing to the high fixed costs of extracting the metal. Mining stocks are considerably more liquid than physical silver as they can be bought and sold during market trading hours.  Silver mining stocks can also be advantageous from a tax perspective, as long-term holders are taxed at long term capital gains rates, which are currently at a maximum of 23.8%. A potential drawback is that investors are exposed to idiosyncratic risks associated with owning the stock of a particular company. To counteract this, investors may look to an ETF, which owns a broad basket of companies involved in silver mining.

Futures: Paper trading of silver is conducted through the futures market. Paper trading provides investors with exposure to silver without needing to physically hold the metal, potentially improving liquidity and reducing the cost of ownership. Unlike the bullion market, futures markets can also allow investors to use leverage. One downside of futures is contango, when future prices of a commodity are higher than their spot price.¹⁸ This can erode gains over time, even if the spot price of silver rises.

Conclusion

Silver is a unique metal because it has properties of both a precious and an industrial metal. We believe this makes silver a useful portfolio holding as it can potentially appreciate in both environments where demand for precious metals is rising, such as during periods of heightened volatility, as well as in eras of strong economic growth where industrial demand is expanding. For long term investors, we believe that a basket of silver mining stocks is a desirable way of gaining exposure to silver, given their leveraged exposure to the underlying metal’s price movements. 

Related ETFs

 

SIL: The Global X Silver Miners ETF provides investors access to a broad range of silver mining companies.

Click the fund name above to view the fund’s current holdings. Holdings subject to change. Current and future holdings subject to risk. 

1. Hoffman, J. E. (2015, January 28). Silver processing. In Encyclopaedia Britannica.  https://www.britannica.com/technology/silver-processing
2. Metals Focus. (2021, April). World silver survey 2021. The Silver Institute.
3. Ibid.
4. Ibid.
5. Bullion Vault. (n.d.) What is silver used for in industry? Retrieved on May 3, 2022 from https://www.bullionvault.com/silver-guide/silver-industrial-demand
6. Metals Focus. (2021, April). World silver survey 2021. The Silver Institute.
7. Garside, M. (2021, May 4). Global gold demand share by sector 2020. Statista.
8. London Bullion Market Association. (n.d.) LBMA previous metal prices [Data set]. Retrieved on May 1, 2022 from https://www.lbma.org.uk/prices-and-data/precious-metal-prices#/
9. Bloomberg, L.P. (n.d.) [Data set]. Retrieved May 1, 2022.
10. Metals Focus. (2021, April). World silver survey 2021. The Silver Institute.
11. Ibid.
12. Ibid.
13. Understand Solar. (2016, February 14). Why silver prices will rise: Solar.  https://understandsolar.com/why-silver-prices-will-rise-solar/
14. Spasić, V. (2021, July 22). Global solar power to cross 200 GW annual installation threshold in 2022. Balkan Green Energy News. https://balkangreenenergynews.com/global-solar-power-to-cross-200-gw-annual-installation-threshold-in-2022/
15. Metals Focus. (2021, April). World silver survey 2021. The Silver Institute.
16. Henbest, S., Kimmel, M., Callens, J., Vasdev, A., Brandily, T., Berryman, I., Danial, J., & Vickers, B. (2021, July). New energy outlook 2021. Bloomberg NEF.
17. Contango: when a commodity’s future price is higher than its spot price.
18. Featured image sourced from Unsplash

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