During a week in which COP 26 was taking place in Glasgow, some fund managers extolled the virtue of silver miners in portfolios, not just for their inflation-protecting attributes but also as a play on the move to a greener world.
In late October, the MFS Junior Gold fund announced a change of name to reflect the fact that 40% of the portfolio is now exposed to silver miners.
Sector Investment Managers (SIM), the adviser and investment manager of the fund, said the move was driven by growing industrial demand for the metal amid the “global shift towards renewable energy, electrification of transportation and other technological developments that favour silver’s superior electric conductivity”.
Another reason it gave is the current backdrop of rising inflation and historically low interest rates, which is likely to result in an investor move to safe-haven assets such as gold and silver bullion.
“This will strengthen the appeal of all aspects of the gold and silver mining-to-market process,” says SIM chief executive Angelos Damaskos.
Demand for silver ramps up
According to the Silver Institute’s World Silver Survey 2021, the total global supply of silver is expected to jump 8% between 2020 and 2021 to 1,056 million ounces. The total supply from mine production is forecast to increase 8%, from 784.4 million ounces in 2020 to 848.5 million this year.
Demand for the white metal is also on the up. The lion’s share is for industrial purposes with an expected 524 million ounces this year, up 8% on 2020, and of this, 105 million ounces is expected to be for photovoltaics, the main industrial use of silver.
The Silver Institute also forecasted that by 2025, the use of silver in electric vehicles (EVs) will ramp up to 90 million ounces by 2025 from about 50 million in 2020 thanks to its efficient thermal and electrical conductivity.
Are other managers as bullish on silver?
Amati Strategic Metals, managed by Mark Smith (pictured) and Georges Lequime, invests in metals from across the spectrum, including gold, silver, copper, lithium, nickel, manganese, platinum group and rare earth metals.
The fund had a 20.1% weighting to silver at the end of September, but this is not as high as its 37.6% exposure to gold. The fund’s silver weighting has kept fairly constant in recent months, between 17% and 20%, and Smith says any change in that allocation is generally with regard to gold re-rating/de-rating.
He is also not sold yet on the renewable technology angle, noting that silver demand for EVs and renewables only really accounts for 3-4% of the total currently. He thinks the market has got carried away with extrapolating the demand for metals in renewable technologies, with many investing in the theme rather than the fact.
For now the Amati managers remain positive on precious metals, but think the demand for more specialist metals will continue to grow alongside the transition to a lower carbon world and move away from fossil fuels.
The higher octane version of gold
The Psigma Investment Management team is bullish on gold miners but views silver as too volatile, with head of investment strategy Rory McPherson describing it as a “higher octane” version of gold.
McPherson says the macroeconomic environment is positive for gold but the team prefers gold miners to physical bullion on the belief they give them more bang for their buck.
He says gold is set to do well with inflation stubbornly above targets and the fact that rate hikes are unlikely to come as soon as the market has been pricing in. Valuations on precious metals miners are currently attractive too, he adds.
“When you’ve got negative real rates, which you definitely have the moment, gold tends to do very well as an inflation protector,” he says. “The other thing would be some of the valuations on offer within the miners. If we look at precious metals, gold and silver are historically cheap versus other commodities.”
Learning from history
Jupiter Gold and Silver fund manager Ned Naylor-Leyland is bullish on silver partly on the macroeconomic backdrop which he thinks will inevitably lead to falling real yields which tend to push up silver and gold prices.
That said, at the end of September, the fund’s defensive model was triggered for just the second time in five years and the fund moved underweight silver miners to gold miners, 45% to 55% respectively.
Writing the latest factsheet, Naylor-Leyland said the fund’s defensive model was last triggered three years ago in August 2018 after US Federal Reserve put pressure on rates expectations to levels that made “credit markets wobble”.
“At the time, we felt the fund’s momentum signal was late (like now) and that bond markets were already at the limit of hawkish tolerance (like now),” he wrote. “So, we moved from one model to the other slowly (23% in bullion and selling a core silver miner holding), being cautious not to get whipsawed by moving too deep into the defensive model when macro and technical aspects were signalling a new rally for metals was ahead.
“This caution and the partial move worked out in 2018 and we sense it may again in 2021,” he said.