If you’ve ever wanted to hedge your portfolio, but thought gold was too expensive, then you might want to look into silver stocks to do so. However, before you even consider hedging or investing in silver stocks or silver exchange-traded funds (ETFs), you would want to know the risks involved with and factors that could affect the commodity.
Introduction to Silver Stocks and ETFs
Silver is often thought of as an alternative safe haven to gold. Now, silver is widely used and is one of the most conductive “previous” metals available. The commodity has uses in electronics, photography, jewelry and currencies, just to name a few. Although silver is not as limited as gold, the precious metal is still valuable due to its multiple uses. Now, as with most securities and commodities, silver prices are based on supply and demand. If the demand surpasses the level of supply, silver prices should rise, and the opposite is true.
That in mind, when silver prices rise, securities exposed to silver should follow in tandem with the commodity. For example, silver stocks, such as Wheaton Precious Metals Corp (NYSE: WPM) and First Majestic Silver Corp (NYSE: AG), should rise and fall with silver prices. Moving on, silver exchange-traded funds are simply marketable securities that track an index holding silver stocks or the price of the commodity itself. In other words, silver ETFs
Now that we’ve gone over the background on silver, silver stocks and exchange-traded funds (ETFs), let’s examine some of the factors that could affect these securities.
Interest Rates and Inflation Affect Silver Stocks and ETFs
Market participants are forecasting inflation to rise under the Trump administration due to potential economic growth. That in mind, market participants are looking for the Federal Open Market Committee (FOMC) to raise rates. Consequently, this would impact the price of precious metals, and in turn, this would affect silver stocks and ETFs. When interest rates rise, market participants may look to invest in U.S. Treasury securities due to higher yields, and since silver is a non-yield bearing, silver prices suffer due to investors shifting their assets to Treasuries.
Since the level of inflation affects the FOMC’s monetary policy, its decision would affect the level of the U.S. dollar. For example, if inflation rises to the Federal Reserve’s target inflation rate, it may look to raise rates, and this would affect the price of the U.S. dollar. However, silver could also be used to hedge your portfolio against inflation, only if the Federal Reserve leaves interest rates unchanged. Moving on, let’s see how currency fluctuations affect the price of silver.
Currency Fluctuations Affect Silver Stocks
Since silver is denominated in U.S. dollars, there is currency risk in the silver stocks and ETFs. In other words, silver stocks could decline if the price of silver depreciates against the U.S. dollar. In other words, there is an inverse relationship between the value of the U.S. dollar and the price of silver. For example, if the U.S. dollar strengthens against major currencies, the prices of silver should drop. On the other hand, if the U.S. dollar weakens, the prices of silver should rise. In turn, silver stocks should follow the same relationship. Additionally, ETFs holding silver mining stocks or are exposed to the price of silver should rise when the U.S. dollar falls, and vice versa. Keep in mind that this is just what has been observed in the markets, and the relationship could change. Consequently, investors and traders should also focus on the price of the U.S. dollar, when considering an investment in silver stocks.
Supply and Demand
As stated earlier, the price of silver relies on the supply and demand of the commodity. If there is an increase in demand, the price of silver should rise, and the opposite is true here. Additionally, if there is a fall in supply, the price of silver should rise, and vice versa. For example, if silver miners are looking to cut mining operations due to unfavorable economic conditions, the price of silver should rise. Additionally, if there is innovation in an industry that finds another use for silver, there would be more demand, and this should cause an increase in the price of silver. That said, supply and demand is an important factor to consider, if and when, you’re considering an investment in silver stocks.
Investing in Silver Stocks and ETFs
Now, if you’re looking to gain exposure to silver, but do not want to hold physical gold or trade futures contracts, you might want to consider silver stocks, such as silver mining stocks, as well as silver ETFs. If you want to hold a diversified portfolio of silver stocks, you might want to consider an ETF tracking the movements of silver mining companies.
The Global X Silver Miners ETF (NYSEARCA: SIL) is one exchange-traded fund that could provide a cost-effective way to invest in silver stocks. The Global X Silver Miners ETF aims to provide investment results corresponding to the general price and yield performance of the Solactive Global Silver Miners Total Return Index, the fund’s underlying index. As of March 31, 2017, the ETF had 25 holdings and total assets under management (AUM) of over $350M.
Check out the daily chart of the Global X Silver Miners ETF and the U.S. Dollar Index.
If you notice the chart above, in which the candlesticks are the prices of SIL, while the line chart plots the levels of the U.S. Dollar Index, you should see the inverse relationship between the U.S. Dollar and silver stocks.
Now, if you want to gain exposure to silver, you might want to consider the iShares Silver Trust (NYSEARCA: SLV). This exchange-traded fund provides exposure to the daily prices movements of silver bullion, and could provide a cost-effective and convenient alternative to purchasing futures on silver or physical silver.
Here’s a look at SLV on the daily chart, overlayed with the levels of the U.S. Dollar Index.
Again, you should notice the relationship between the ETF and the U.S. dollar. For the most part, you’ll notice that when the U.S. Dollar Index rises, SLV tends to fall.
The Bottom Line
If you’re looking to invest or trade silver stocks or ETFs, you should keep in mind these factors that could affect the price of silver. However, keep in mind that these are not the only risks associated with silver. However, they’re some of the main factors that could affect the price of silver, and in turn, silver stocks.