Demand for silver skyrocketed this week, off the back of the latest campaign from Reddit’s r/wallstreetbets group. Investors may wonder what’s beyond the frenzy and whether the Reddit campaign has unexpected substance to it.
The Reddit Story
Following a bid to counter short-selling of GameStop, r/wallstreetbets turned its collective eyes to silver. With the claim from some segments within the Reddit group that silver prices were being held artificially low by bank and hedge fund manipulation and short-selling, amateur investors piled in to purchase silver ETFs and mining companies in a bid to push prices up.
There were record volumes for trades into US silver ETFs on Monday 2 February 2021 and prices rose to eight-year highs. While the GameStop campaign may have been successful in pushing prices up, silver is a different story for a few reasons.
Firstly, silver is a far larger, more complicated and more valuable market compared to the much smaller share pool of GameStop. Silver is used and purchased for industrial and investment purposes and only a portion of the world’s silver reserves is traded on stock exchanges. Effectively, there are more factors influencing the prices of silver than simply share trading.
Secondly, there are only limited short positions in silver, in fact, most banks and investment managers hold long positions on silver and held a positive outlook on silver’s prospects prior to the Reddit rally¹. By contrast, there were concerns over GameStop’s future before Reddit warriors pushed prices up to levels that are now considered vastly inflated compared to the company’s financial position and prospects.
While the rationale for the silver Reddit rally may be flawed (and there are questions over the extent Reddit really caused the rally), investors may have inadvertently selected an asset with a promising outlook and potential benefits to a portfolio. It is up to investors to take the time to assess the value of silver before selling up when the frenzy eases.
The drivers of silver and it's outlook in 2021
Silver has a range of uses and more than 50% of demand is for industrial purposes, such as in cars, solar panels, medical equipment and electrical circuits². Annually, over 36 million ounces of silver is used in motor vehicle production³ and this is predicted to grow to nearly 90 million ounces by 20254 Silver is also antimicrobial, which makes it popular in medical use5.
In 2020, silver supply and demand was affected by COVID-19 with lockdowns dampening industrial demand, while mining production also fell and impacted supply. Industrial production is tipped to ramp up in 2021, supported by government stimulus packages globally, the rollout of vaccines and the prospect of economic recovery. In turn, demand for silver is likely to increase in line with this.
Further, silver is heavily used in renewable energy systems, such as solar panels and as part of electronics. Silver is also likely to benefit from the refocused efforts on climate change globally, with a number of major renewable energy projects announced, such as the NSW government’s $32 billion renewable energy plan6.
Investment demand for silver was also trending upwards from late 2020, with investors looking for alternative safe-havens to gold. Silver-backed exchange-traded products (ETPs) surpassed 1 billion ounces for the first time7. Silver can be used as a store of value and traditionally offers positive performance during periods of low interest rates. With the prospect of continued low global interest rate and concerns over potential inflation, investors have shown increased interest in exposure to this precious metal.
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