Peak Rates Mean Silver’s Time Has Come

Looking at the one year price performance of precious metals, one would be forgiven for wondering why silver and gold investors look so glum.

Gold is up 10%, while Silver prices have risen 5%.

Gold and Silver Indexed Performance (1 Year %)

A suprisingly strong result give the real rate of interest – typically a headwind to rising precious metals prices – has been on the rise. Assets that generate no cashflow, silver and gold, are worth less when borrowing is more expensive and vice versa.

Real Rate of Interest (Nominal – Inflation)

Source: Federal Reserve Bank of St Louis

But for the typical investor who owns the companies digging the gold and silver out of the ground, the past few years have been one dissapointment after another.

Silver miners in particular have underperformed the physical metal by 20% over the past year. Over two years, the underperformance doubles to 40%. The performance difference can largely be expained by growing recession fears and worries about production cost inflation across the industry, warranted or not.

Silver vs Silver Miners (1 Year % Change)

Source: YCharts

But silver is finally at an important crossroads.

Strong underlying precious metals buying from consumers and central banks has been with us throughout the silver stock selloff, but going forward, the two worst headwinds are now turned into significant potential catalysts.

  • Interest rate policy
  • Industrial demand.

We dig into both of these tailwinds in detail below…

Holding Costs Have Peaked

Expectations for further interest rate hikes are completely off the table and investors are now pricing in interest rate cuts starting this summer.

Though the path of interest rates rarely follow expectations exactly, the important takeaway is that the probability we see higher interest rates in the future is very low.

Just think, if silver can go up 5% while real rates doubled in 2023, what will happen to prices if we see rate cuts?

Market Implied Interest Rate Cut/Hike by Month

Source: CME Group

Industrial Silver Demand is Hot and Underappreciated

Silver has always been intertwined with gold as a store of value, but it’s also driven by economic growth and industrial demand, more specifically.

For this reason, the gold to silver ratio exhibits an interesting pattern around major economic events. When economic growth is weak, the gold to silver ratio spikes as silver prices decline more than gold from falling industrial usage.

Historically though, this is the perfect time to buy silver. The ratio almost always declines as demand rebounds.

Gold/Silver Ratio Spikes in Recessions then Declines

Source: COMEX

Buying silver when the gold/silver ratio is at 80 or above has historically led to strong relative returns. Today we sit at 88.

A silver/gold ratio of 88 would be an attractive entry point on its own, but we are also looking at the strongest industrial demand outlook for silver in 30 years.

The raipid buildout of renewable energy infratsructure is supercharging demand for the two most conductive metals in the world, silver and copper.

Silver demand for use in solar panels has grown at a 16% annual rate since 2015 and continues to exceed forecasts year after year.

Silver Demand in Solar Panels Growing Fast

Source: Silver Institute

Typically when silver prices increase too much too fast, consumers dig out their old silverware and jewelry and head to the pawn shop, keeping a lid on prices. However in this cycle, solar demand has grown to the point where it is eating up almost all recycled silver supply.

Source: Silver Institute

Recycling won’t be here this time if renewable demand begins to exceed mine growth.

Solar demand hit 160 million ounces in 2023 and could grow to 215-225 million ounces by 2025 with 627 GW of solar installations expected according to Bloomberg.

215 million ounces is 21% of all silver supplied and exceeds recycling by 1.2x.

Global Solar Panel Installation Outlook

And silver mine growth is on the decline. Mine supply declined 40 million ounces over the past 10 years while demand from solar panels grew 110 million ounces.

Silver Mine Supply Has Gone Nowhere

A price spike could be required to incentivize enough new mine supply. As soon as silver buyers come back into the market, confident we won’t see a major global recession,┬áthe true tightness in the silver supply and demand will become apparent, driving an increase in prices.

Mining Liabilities are About to Become Assets

The same operational leverage that dragged down silver mining stocks vs physical silver in the past will quickly turn into an asset in a rising price environment. The same investors who shunned miners due to cost inflation fears, will come running back for the cashflow leverage.

A typical silver company will see cashflow increase 2x-4x the increase in the metal price due to a fixed cost structure and the use of debt.

For that reason we are big believers that a bid is fast approaching for beaten down miners.

However, not all mining stocks are created equal in a bull market.

Sure you could buy mega-producers like Pan American Silver (Ticker: PAAS) or Fortuna Silver Mines (Ticker: FSM), but the better risk adjusted move with higher silver prices on the horizon is to buy high quality explorers who can grow their resources and reserves.

Large producers are what you own to limit downside in a declining market. Their cashflow, in the form of dividends and buybacks, provides a buffer against stock declines. However, when silver supply is scarce and prices are rising, explorers are the ones who will see the largest rate of change in valuation per ounce of resource.

Silver miner’s are so beaten down that you don’t even need to travel to obscure emerging countries to generate market beating returns. There are explorers and developers operating in stable, developed markets, like the US and Canada, offering more than enough return exposure.

The company we’ve chosen as an example below has all the key characteristics of a successful explorer, making it a perfect test case, however they are not the only well positioned silver company in the North American market.

Summa Silver (TSXV:SSVR) (OTCQX: SSVRF)

Summa Silver pursues a lower risk business model focused on using extensive analysis of historical resource data and modelling to target prematurely closed mines with the potential to host very large undiscovered reserves.

The company is an explorer operating out of properties in New Mexico and Nevada, two areas with the lowest political risk and fastest permitting timelines in the world, according to the Frasier Institute.

Summa Silver Nevada Project Overview

Source: Summa Silver

Summa is drilling both properties throughout the year, offering investors market based upside and exploration upside from a growing potential resource base.

Recent high grade gold discoveries from fellow Nevada miner, Nevada King (3.5g/t over 61 meters), prove that precious metals resources in the state are valuable to the market and most importantly financeable as exploration transitions into development.

According to Galen McNamara, the company’s CEO and principal geologist, the Hughes project in Nevada has similar geological and production characteristics to the largest gold and silver districts in Mexico.

With only 4km explored in the district, compared to typical district lengths of 8km to 18km, Summa believes this previously producing district is less than half explored. Significant additional resources still to be found.

Nevada (Tonopah) Project Comparison to Major NAM Silver Discoveries

Summa has backing from major investors like Eric Sprott, who holds an 18% stake, while management is still well incentivized with 26% ownership.

Source: Summa Silver

Silver: Summing it All Up

Silver stocks have been hurting recently, but with major headwinds now turning to tailwinds in 2024, investors need to take a hard look at their silver exposure.

Silver is facing the most acute supply shortage in decades, but the market doesn’t yet appreciate this reality. Economic worries are overshadowing extremely strong underlying silver demand, which can’t last forever.

When continued mine supply dissapointment, Cobre Panama for example, start to overshadow economic worries, the result could be explosive for silver prices.

Kobo Resources is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.

Summa Silver Corp is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.

Duane Hope is a Partner at Capital 10X, he brings over 15 years of communications and research experience to the firm. His research and writing have appeared in publications for North American, European and Asian audiences.

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