Silver has had a fabulous time this year. It might look as if its breathtaking rally is already over, but it has not even started yet. The shiny grey metal was trading near $30 per ounce in August. But its price dropped somewhat last month. In this article, I will mostly focus on silver. But I will also compare it to gold. In my view, both of these metals have great potential for growth. I also consider iShares Silver Trust ETF (SLV) to be a sound investment. Here I will explain why.
Quantitative easing and the Fed
Some experts might argue that the worst is already behind the world’s economy. After all, the coronavirus vaccine is about to become available to many people all over the world. What’s more, in spite of the second coronavirus wave, most governments seem to be reluctant to take the measures they did this spring, forcing their countries in another lockdown. So, there won’t probably be so much damage to the world’s economy there was earlier this year. That is why some analysts think there will not be much more quantitative easing. So, there won’t be much more support for gold and silver.
However, even if we assume there won’t be any similar restrictions we used to have in spring, many countries still look quite different from where they were before the pandemic. The air traffic is still quite low, many bars and restaurants are shut. Many consumers are unwilling to go to shopping centers. Health experts, especially in Europe, talk of the second infection wave. What’s more, some say the situation is at its tipping point and similar to the one there was in March. So, if the governments do not manage to bring the spread of the virus down, another full-scale lockdown might be implemented pretty soon.
Even if it does not get implemented, it might take the world’s economy ages to restore to normal. The Fed’s officials seem to fully understand it. Many of them pledged the interest rates would stay near zero at least until 2023.
And how about quantitative easing? Well, it looks like the fiscal stimulus package will be passed pretty soon. So, more “helicopter money” will become available too. There was recently an argument about the size of the government’s aid. Many analysts argue that in the case of Biden’s win, more money will be spent on infrastructure, education, and healthcare. As we all understand, this financial help doesn’t come out of nowhere. The Fed will have to print more money to finance these expenditures.
Let us also be mindful of the fact both gold and silver tend to be safe havens in case of any political headwinds. Nowadays seems to be a highly uncertain time also because of the US presidential elections. Some experts even predict there will be a violence outbreak in the aftermath of the November election.
The political situation might lead to a stock market crash. The precious metals will probably plunge too in the short run. In the long run, however, the Fed would have to ease the monetary conditions even further, thus, bringing the gold and silver prices to new highs.
Gold and silver prices – history
Let us look at the two metals’ track records.
As can be seen from the graph below, $10,000 invested in gold in 2000 would have become $70,000 by 2020, whereas $10,000 invested in silver would have turned into $53,000 by 2020.
The gold price growth rate looks unbelievable. Does not it? It might look as if the inflation rate in the US was incredibly high in the last twenty years.
CPI inflation calculator
Source: Official data
But it was not. In fact, in order to cover the inflation, your $1 invested in 2000 would have had to become $1.51 in 2020.
However, as can be seen from the gold price graph above, $10,000 invested back in 2000 would have been worth more than $70,000 now. As you can see, gold more than covers inflation.
But how about silver? Well, on the surface it looks as if it badly underperformed its “big brother”. However, during periods of volatility, it outperformed gold. This is particularly obvious if we look at the Great Recession. The silver price surge was quite impressive between 2008 and 2011. The two commodities behaved just the same after the spring market crash this year with silver outperforming the yellow metal. This can be seen from the graph below.
My colleague Adam wrote a very interesting article about silver’s potential to plunge in price. He argued there was already a large rise in the capital invested in silver ETFs. So, the growth potential is, at the very least, limited. It sounds logical, of course. However, if we look at how interested the investors really are in buying commodities, we might get surprised. Many professional investors only allocate 2% of their money to buying gold. Some avoid the yellow shiny metal. As concerns millennials, many of them consider both gold and silver to be old-fashioned. At the same time, many investors – portfolio managers and novice investors alike – invest heavily in FAANG stocks. So, if you look at the situation from this perspective, the two metals are, in fact, undervalued because the interest in these metals is limited. It is even truer of silver, which is a very small investment market.
But you might be wondering how much you could earn by investing in iShares Silver Trust ETF.
As can be seen from the graph below, there is a very strong correlation between the prices of silver and iShares Silver Trust ETF.
Well, the forecasts vary. Some conservative experts even said silver might reach $86 or $130 per ounce in the next several years. The same experts only expected the silver price to reach $18 this year alone. But if I just look at the graph below, I will see the silver price crossed the $45 mark in 2011. In fact, the maximum price for silver at the time was $47.94. However, the economic shock at the time was not as great as it is today. So, the government will end up spending much more during this crisis than it did during the Great Recession.
That’s why I think silver has the potential to cross at least the $50 mark in the next 3 years.
Silver as an industrial metal
There is, however, one risk for the shiny grey metal. It has many industrial uses. For instance, it is heavily used in medicine, solar energy, producing batteries, semiconductors and touch screens. There is a risk the economic recession will last for a long time. So, the production levels will remain low. However, this is not my basic scenario. I believe the fiscal and monetary stimuli will force the demand for industrial metals, including silver, upwards in the longer run. Even if the industrial demand does not return to where it was, the demand for silver as an investment will go up. This is because it might be bought both as a safe haven and as an inflation hedge.
Silver has great growth potential. It is bought as a safe haven and as an industrial metal. The Fed’s monetary policy, government spending, macroeconomic and geopolitical uncertainty are all very bullish factors for the commodity. My estimates of doubling wealth over a period of three years might even be conservative. In spite of this year’s breathtaking rally, silver is heavily underinvested, in my opinion.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.