Investment thesis and background
Now is an interesting and challenging time for investors. Equity valuation is near a historical record high, treasury rate is near a record low, and inflation is surging. To top it off, we also have a war undergoing in the Ukraine region. Under such uncertain times, precious metals have become appealing as an effective tool for hedging and capital preservation. The Sprott Physical Silver Trust (NYSEARCA:PSLV) offers a good avenue for ordinary investors to own silver backed by physical silver.
In particular, you will see 3 reasons to consider adding silver to your portfolio now.
- The first two reasons are to hedge against volatility and inflation. In the short term, silver helps to stabilize our portfolio. And in the long-term, they have been effective fighting inflation. And the underlying reasons are because of its role both as a currency metal and also its extensive commercial applications.
- And third, there are favorable odds for its price rebound after years of compression. Silver price now is overdue for an upward correction. There are certainly some good catalysts now, including the surging inflation and also the war in Ukraine which is disrupting the supplies of major commodities (and which in turn may even exacerbate the inflation).
Reason 1: hedge against market volatility
With the uncertainties mentioned above, especially since the Ukraine war broke out, we are going through some large volatilities recently, with the market fluctuating more than 2%. To put things into perspective, the S&P 500 moves between -1% and +1% a day for 70% of the days from 1999 to 2019. It only moves larger more than 2% about 20% of the time. The market moved more than 2% several times in the recent 2~3 weeks as you can see from the following chart. And the VIX fear index exceeded its 90% percentile almost during half of the trading days.
As you can also see from the following chart, the silver price has been moving in opposite directions to the overall market under such turbulent times. Since the end of Dec 2021, PSLV price has rallied to the current level of about $8.4 a share from about $7.8. And its price appreciation has been almost 12% at its recent peak. In contrast, the S&P 500 has lost about 11% since then.
At uncertain times like this, silver (and gold too) really helps to stabilize our portfolio because their roles both as a currency metal and also extensive commercial applications.
Reason 2: hedge against inflation
The next chart focuses on silver price and inflation. The next chart shows that silver has provided a good hedge against inflation in the long term (and again, gold too). As seen, from 1970 to 2021, inflation is on average 3.88% CAGR, and the silver price has appreciated at 5.49% CAGR. So silver price appreciation has outpaced inflation by more than 1.6%, a pretty substantial margin over such a long time. Of course, gold did even better in this period of time: its price appreciation of 8.01% CAGR, far exceeding the 3.88% of inflation. And again, the underlying reasons are silver and gold’s role both as currency metals and also their extensive commercial applications.
Reasons 3: silver price is overdue for a rebound
The current silver price, when examined under a long-term horizon, has been under compression for almost a decade as shown in the chart below. A price rebound is overdue and now might be the starting point of a new commodity cycle. There are certainly some good catalysts now, including the surging inflation and also the war in Ukraine which is disrupting the supplies of major commodities (and which in turn may even exacerbate the inflation).
As aforementioned, silver price has been consistently beaten inflation in the past until it stopped for the past 9 years or so as you can see from the following chart. Silver price is now where it was about 9 years ago. As a result, a rally in silver prices is overdue. The recent rally to $30 is only enough to keep pace with inflation in the past 9 years. It may be just the beginning and its prices have more catch up to do in the near future, especially as inflation is surging.
Conclusions and final thoughts
- Under current market conditions, silver is a safe haven investment due to its role both as a precious metal and its extensive commercial applications. Historical data have shown that silver is a good hedge against market volatility and also other assets (such as equity and also treasury bonds) in the long term.
- Furthermore, there are favorable odds for silver price to rebound after years of compression. Silver price now is the same as it was 9 years. And it’s overdue for an upward correction. It should be about 20% higher than its current price level just to keep pace with inflation. And there are some good catalysts now, including the surging inflation and also the war in Ukraine which is disrupting the supplies of major commodities (and which in turn may even exacerbate the inflation).
- Finally, we ourselves do not use PSLV to gain exposure to silver, we use the Aberdeen Standard Physical Silver Shares ETF (NYSEARCA:SIVR). And our main consideration is expenses. PSLV charges an expense ratio of 0.62% (vs 0.30% for SIVR), which represents a risk by itself. The differences in these costs do not seem to be large in absolute terms. But when compared to the longer-term price appreciation after inflation (typically in the mid-single-digit over a few decades as shown in the chart above), this difference in expense ratios becomes quite critical.
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