Silver Poised to Thrive Against Backdrop of Ideal Conditions

A $6 trillion budget for 2022. Annual deficit spending of at least $1.3 trillion every year of the next decade. And a federal debt projected to grow by a stunning 80% by 2031.

These are just some of the anticipated fiscal outcomes of the ambitious Biden agenda. They also are among the reasons many experts are optimistic about the outlook for precious metals through the foreseeable future.

But within what could be a generally robust environment for precious metals overall lurks a particularly good opportunity for silver specifically. For one thing, not only does silver have the same general potential as gold to help hedge against the possibly dollar-debasing effects of profligate government spending, but there is some evidence silver could be even superior to gold in that capacity. 

A compelling case for silver also exists on the basis of its significant industrial demand, particularly in light of the burgeoning green-energy movement. Silver’s inherent properties of first-rate thermal and electrical conductivity are expected to play an essential role in the global “electrification” effort.

Additionally, there’s the matter of silver’s greater volatility, a function of silver’s considerably smaller market. Amid ideal fundamental conditions for the white metal – such as those this article suggests are in place presently – this volatility can act to intensify the upward momentum produced by those positive fundamentals.

To be sure, silver already has logged an impressive performance relative to gold recently. In pandemic-riddled 2020, silver appreciated 47% as gold rose 25%. And since December 2018, when the current precious metals bull began to run, silver has climbed 85% to gold’s 48%.

But there are sound reasons for believing the good times for silver may be just beginning.And those retirement savers who’ve been guilty of looking past silver previously might want to reconsider doing so again as a host of pro-silver factors appear poised to push the metal higher in the months – and perhaps even years – to come. 

Record Budgets, Massive Annual Deficits Could Energize Silver in Years Ahead

A great deal of attention has been paid recently to the perceived safe-haven capacity of gold in light of the expectation we’ll see record annual budgets and annual deficit spending in the trillions for the next 10 years. “You can’t have a better environment for gold,” currency strategist Adam Button recently told Kitco News. “The government wants to spend more money and the central bank is going to keep interest rates low.”    

Gold indeed has the potential to thrive amid such a fiscal and monetary environment. But so does silver. As a matter of fact, a look at recent history reveals that silver can significantly outperform gold during periods characterized by both record low interest rates and massive levels of deficit spending.

One of the best examples of silver’s outsized performance in this kind of environment comes to us courtesy of the 2008 financial crisis. As the government desperately tried spending its way out of the debacle, annual deficits reached record levels (at the time) in years 2009, 2010 and 2011. On the monetary side, the Federal Reserve began quantitative easing (QE) for the first time in its history during the crisis; QE1 kicked off in November 2008, and was followed up by QE2 in November 2010.

Against this wildly expansionary backdrop, gold soared 160% from November 2008 to August 2011. An impressive run, to be sure. However, silver out performed gold by more than double over the same period, soaring 340%.

In addition to the significant spending we’re expected to see over the next decade, the Biden administration is counting on interest rates staying put at or near record lows for all that time. If that bears out, it presents a potentially fertile climate for gold. But silver’s demonstrated capacity to flourish even more during similar climates is, in my view, a good reason for retirement savers to pay particular attention to the white metal’s prospects right now.

Analyst: Silver Is “a Turbocharged Version of Gold” Due to Green Energy Boom

Opportunities in precious metals typically are framed in terms of their capacity as crisis assets. That is, as assets possessing a demonstrated tendency to strengthen at times during periods characterized by economic and/or geopolitical uncertainty or upheaval.

But silver’s “coin” has another side to it: Its industrial indispensability. Silver is the best of all metals when it comes to the conduction of heat and electricity. Because of this highly significant property, industrial buyers make up more than 50% of silver’s annual demand.

As it is, the global economic recovery is expected to boost silver’s industrial demand – and its price – this year. But it is the white metal’s overriding importance to the rapidly growing worldwide green energy movement in particular that has many analysts especially optimistic about silver’s outlook going forward.  

One such analyst is Jeffrey Currie, global head of commodities research at Goldman Sachs. Earlier this year, Currie appeared on CNBC’s “Fast Money: Halftime Report” and referenced both gold and silver’s robust potential based on the nation’s anticipated fiscal and monetary environment through the foreseeable future. But Currie also made special mention of what he sees as silver’s especially rosy outlook due to the metal’s cruciality to the green energy industry. At one point, Currie said he views silver as no less than “a turbocharged version of gold” because of the metal’s essential role in the manufacturing of solar panels. Estimates point to the solar energy market growing at a compound annual growth rate of 20% through 2026.

Currie is by no means the only analyst expecting big things from silver based on the predicted growth of the green energy industry. Like Currie, Canadian Imperial Bank of Commerce (CIBC) analysts also see a bright future for silver because it is such a critical component of solar energy products.

In a proprietary report, CIBC analysts point out solar energy represents only 10% of the global power capacity presently and say capacity could double in the next four years. The analysts additionally note that a global power capacity of 10% suggests significant upside potential to the growth of solar energy over the long term.

“The continued focus on renewable energy worldwide, as well as re-engagement and leadership from the U.S., provides a favorable backdrop for future growth in solar power,” CIBC analysts wrote. “Historically, silver has tended to outperform gold during bull cycles for precious metals, and we believe this solar narrative could be an important driver in both industrial and investment demand for the metal.” 

Silver’s Smaller Market and Increased Volatility Could Enhance Upward Momentum

Silver is more volatile than gold. And it you’re familiar with volatility, you know it often is portrayed as a negative feature. For example, when financial markets encounter turbulence and certain equities drop more than others during the tumult, those equities frequently are characterized as being particularly volatile.

But volatility in and of itself is not necessarily a negative. That is, the features of an asset/savings vehicle that make it prone to especially sharp downward swings during poor conditions can also prompt significantly greater gains during optimal conditions.  

The principal reason for silver’s greater volatility is its considerably smaller market. One of the characteristics of smaller markets is that it takes fewer dollars flowing either in or out of them to cause sizable changes in value. Presently, silver’s total market capitalization is roughly $1.4 trillion. Gold’s market capitalization is around $11.4 trillion. This means silver’s market is just 12% the size of the entire gold market.

There have been a number of periods during precious metals bull markets when silver’s upside volatility appears to have played a role in providing additional energy to the metal’s upward momentum. Last year provided us with one example, in my opinion. As concerns about the pandemic’s ultimate economic fallout spread rapidly from the spring through the summer, both the Federal Reserve and U.S. government went into action. The Fed embarked on a program of “anything goes” QE while the government increased deficit spending by 320% from March through September last year. Gold climbed 13% from July through the first week of August, but silver soared during the same period, climbing 50%.

To be clear, silver’s potential upside volatility is recognized by a variety of metals experts as a genuine benefit. Among these experts is the Silver Institute, which has cited this tendency to greater volatility as a reason why the group expects silver to outperform gold in 2021. “Given silver’s smaller market and the increased price volatility this can generate,” the Silver Institute said in February, “we expect silver to comfortably outperform gold this year.

Silver Has a Unique Potential That Cannot Be Fulfilled by Gold

It’s tempting for some retirement savers eyeing precious metals as a possible asset option to view gold and silver somewhat interchangeably. The inclination is understandable. The popular narrative about precious metals is that as genuine or “hard” assets popularly thought of as stores of value, their principal role is to help mitigate one’s overall holdings from the effects of economic and/or geopolitical risk. Accordingly, the only real difference in the eyes of casual observers is silver’s price, which typically persists as a fraction of gold’s price.

Again, that’s the perception of casual observers. Astute retirement savers are not that, however. Astute savers recognize that beyond the broad similarities between gold and silver, there are important differences that suggest a complete, fully optimized precious metals savings account is one that contains quantities of each metal. 

The fact is that far-cheaper silver often is overlooked in favor of its more glamorous counterpart, but I think that can be a big mistake. As this piece has detailed, there are key potential benefits to owning silver, including – and especially – its indispensability to industry. And silver’s tendency to outperform gold during precious metals bull markets triggered by macroeconomic weakness is particularly noteworthy, in my opinion. 

Silver indeed may be the less glamorous metal. But when it comes to potentially adding value to one’s IRA, it is, in my view, every bit as important – and sometimes even more important – than gold.