How I Am Playing the Boom in Silver

A Shining Opportunity and its Inevitable Disappointments

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Two things before we start:

1. I am going to the Edinburgh Fringe this August to do one of my “lectures with funny bits”. This one is all about the history of mining. It’s called Shaping the Earth. As always, I shall be delivering it at Panmure House, where Adam Smith wrote Wealth of Nations. It’s at 2pm most afternoons. Please come. Tickets here.

2. My first book and many readers’ favourite, Life After the State - Why We Don’t Need Government (2013), is now back in print - with the audiobook here: Audible UK, Audible US, Apple Books. I recommend the audiobook ;)

So to the metal of the moon.

I must confess I am in two minds about silver.

On the one hand, this move above $30/oz is long overdue. $50/oz is coming into view. And if silver goes north of $50/oz - and one day it will - then the sky really is the limit.

On the other hand, it’s silver. If there is one thing you can count on in the cruel world, it is that silver will always let you down. The golden (haha) rule when investing in silver, and I speak from experience, is not to get your hopes up. Silver has been disappointing its champions since 1873, when America's Coinage Act, known “the crime of 1873”, got rid of the standard silver dollar altogether and with it bimetallism.

Silver’s currently so overbought, and there is so much excitement about it, perhaps we should short the thing. Beware the RSI.

We will start with a brief overview of silver - both its potential and its propensity to disappoint. Then I’ll suggest some ways to invest. Spool down to the bottom if you want my pick of the small caps: this one really has potential and it’s one of my biggest positions.

A quick bit of silver history that I bet you didn’t know

As one of the seven native metals, metals which can be found in nature in pure form, human beings have been using silver since the dawn of civilisation and probably before. Its first use was as jewellery. Its next was as money. Silver shekels (about ¼ ounce) were currency in Ancient Mesopotamia, long before the invention of coinage. The words silver and money - argent in French, plata in Spanish - are interchangeable in numerous languages, ancient and modern.

Silver even got its own planet, the moon, and its own day of the week, Monday.

Silver’s use as money started to die after the gold rushes of the 19th century dramatically increased world gold supply, so that by 1900 every major nation in the world, except China, was on a gold standard. Bimetallism was a thing of the past. With silver no longer money, demand for it fell, despite the fact that it probably has more applications than any other metal. The price has mostly struggled ever since.

There is roughly 15 times as much silver in the earth’s crust as there is gold, so the natural ratio between the two should be 15 or thereabouts, and the historical ratio between the two was always in that 12-18 area. In other words, 15 silver coins would get you a gold coin of the same weight. However, so undervalued has silver become, that over the last five years that ratio has averaged between 80 and 90. At one point during Covid, it went to 125.

Today, even after the amazing run silver has had, it is at 75.

The gold-sliver ratio since 1990

Despite the perennial disappointment of the silver price, every now and then it moonshots - and returns to its rightful place in the sky. It went from below $5/oz in 1978 to $50/oz in 1980, followed by 20 years of disappointment.

It went from below $8/oz in 2008 to $50/oz in 2011. There then followed another 13 years of disappointment.

But those moonshots were very brief. You had a day or two to get out.

Are we midway through another moonshot? It is very possible.

Let’s just say the gold price stays where it is around $2,400. I happen to think it is going higher, but let’s just say it stays where it is and the silver-gold ratio goes to 55, where it averaged for most of the noughties. Then the silver price would have to be $43/oz. It’s $32/oz today.

Let’s just say the ratio goes back to 31, where it touched in 2011. Then silver goes to $77/oz.

Here’s the thing: there is an argument - and a strong one - that the silver-gold ratio should actually be lower than the natural ratio of 15 because, while all the gold that has ever been mined still remains, the silver has been used and consumed. It’s no longer there. So there is less silver per ounce of gold than there previously was. At a ratio of 15 the silver price goes into the hundreds of dollars. And that’s all without the gold price moving. What effects do these kinds of price rises have on the profits of silver miners?

It may seem like fantasy, but these kinds of narratives gain traction in bull markets, especially around silver which has a lot of love and support among its investors. In the US, in particular, there is a special fondness for silver amongst patriots and traditionalists, and bull markets ignite those sentiments.

Silver since 1970

Silver’s uses today

Silver is to modern technology as sugar and salt are to modern food: it is in everything. It is almost harder to find things that don’t contain silver than things that do. Every smartphone has silver in it; every computer; every jet engine; every solar panel. The best batteries contain silver; it’s used in detergent, deodorant, wart treatment, antimicrobial lab coats, 3D printing, plastics, jewellery, wood preservation, and water purification. It’s like a “picks-and-shovels” play on new tech and the growing middle class of the developing world. It is often associated with magic in folklore, but its properties are so varied and widespread, there really is something magical about it. Because it has so many industrial uses, it is something of a mystery why the silver price has been so low for so long. Some blame dark forces, others blame market forces, but since the demonetisation of the late 19th century, the words silver and price suppression have commonly been uttered in the same sentence. Conspiracy or not, there is not a lot you or I can do about it, so we just have to accept the market for what it is.

Despite my long-documented ambivalence towards silver - I’ve gone from being a full-on, silver-fixes-this-and-saves-the-world bug to an unwelcome cynic - I still own physical metal, and I have an oversized position in a Mexican silver development play that will, I hope, turn producer as soon as this year. I’ll tell you about that in a moment.

How to invest in silver

Broadly speaking, these are the four ways to get exposure to the silver price:

1. Buy silver bullion - coins and bars

2. Buy a silver ETF

3. Buy silver via a spread bet, CFD, or a future

4. Buy a silver mining company

If it’s bullion you want, try the Pure Gold Company and tell them I sent you. (They deliver worldwide or you can store with them).

If you have the time and the inclination, you can often pick up antique silver, especially Georgian silver tea sets, on eBay and elsewhere at prices below the spot value of the silver content.

Exchange Traded Funds (ETFs) are simple and cheap. You buy them through your broker just as you would any share. New York listed SLV is the biggest. For UK investors there are the WisdomTree Physical Silver ETFs (PHSP.L and PHAG.L). PHSP is denominated in pounds so will save you forex charges (unless you have dollars you are looking to invest). The Invesco Physical Silver ETC (SLVP) is another pound-denominated option, and iShares’ ISLN is dollar-denominated.

There are also two- and three-times leveraged ETFs. Caveat Emptor. If you know what you are doing, these can be good vehicles, but the costs can be quite high if you hold them for a long time. WisdomTree has a range, both long and short, and 3LSI.L is the ticker for the pound-denominated 3x option.

While on the subject of caveat emptor, there is also the CFD and spread bet option. If the market moves in your favour, they can be very rewarding, but you can also lose a great deal more than your initial stake. Be sure to manage your risk - i.e., have an exit if the market goes against you - and keep your position sizes manageable. The most common mistake is to make position sizes too big.

So to the miners - and own play on the sector

Finally, the gold and silver miners are starting to move. Exciting times. It has been a long wait.

The simplest way to buy silver mining companies, again, is via an ETF which tracks a basket of them.

Listed in both London and New York, both dollar-denominated, the GlobalX Silver Mining ETF (SIL.NYSE, SILG.L) is one option. The iShares MSCI Global Silver Miners ETF (SLVP.NYSE) is another. And if you want to get really spicy, there’s the US-listed ETFMG Prime Junior Silver Miners ETF (SILJ.NYSE), which tracks the small caps.

Fresnillo (FRES.L) and Hochschild (HOC.L) are the two biggest London-listed pure silver plays.

My picks of the large caps are Silvercrest (TSX:SIL), Pan American (TSE:PAAS), Mag Silver (TSE:MAG); and First Majestic (FR.TO, AG.NYSE), run by my buddy Keith Neumeyer, for which I have a very soft spot. It also has a bullion shop.

So to my pick of the juniors

I think this company has real potential.