Investors who are thinking about a precious metal position may want to take a look at silver bullion and related exchange traded funds as an alternative to gold. However, the metals may face short-term risk in a rising rate environment.
Year-to-date, the iShares Silver Trust (NYSEArca: SLV) rose 1.3%, ETFS Physical Silver Shares (NYSEArca: SIVR) gained 1.7% and PowerShares DB Silver Fund (NYSEArca: DBS) increased returned 0.9%. In contrast, the SPDR Gold Shares (NYSEArca: GLD) dipped 0.3% so far this year. [Silver ETFs Outperform Other Precious Metals]
COMEX silver futures are now trading at about $16.1 per ounce.
Supporting the silver market’s outlook, demand is outpacing supply, silver bullion is trading at a relative discount with expectations for further gains, industrial demand is rising and the metal is outperforming gold so far this year, reports Myra P. Saefong for MarketWatch.
The physical silver market has been stuck in a global supply deficit over the past two years, according to the Silver Institute. Looking at the top five producers and consumers of silver, demand amounted to $8.9 billion in 2014, compared to supply of $7.1 billion.
Thomson Reuters also expects global supplies to run short of demand by 57.7 million ounces this year.
“With silver supply now in deficit relative to demand in three of the last four years, it appears the silver price has to rise,” Bradford Cooke, chief executive officer and director of Endeavour Silver Corp (NYSE: EXK), said in the MarketWatch article. “There is no new mine supply ready to be developed, yet industrial demand continues to grow.”
Silver has many industrial applications, including electronics, optics, biotechnologies and solar panels.
However, silver traders may have to contend with some headwinds ahead, notably the Federal Reserve interest rate hike.
“There is entirely too much headwind and uncertainty concerning the U.S. dollar not to mention a 100% chance that interest rates will rise, giving a higher-yielding haven to safe money relative to that of silver,” Adam Koos, president of Libertas Wealth Management Group, said in the article.
Consequently, over the short-term, investors should wait or even hedge against a fall with inverse silver ETF options. Traders can take a look at the VelocityShares 3x Inverse Silver ETN (NYSEArca: DSLV), which takes the -300% performance of silver, and the ProShares UltraShort Silver (NYSEArca: ZSL), which takes the -200% performance of silver price movements.
“Short-term and medium-term silver [investors]should wait for a clear trend reversal and then invest,” Chintan Karnani, chief market analyst at Insignia Consultants, said. Meanwhile, long-term investors can invest in small increments, buying the same dollar value amount on any 15% dip, Karnani added.
The silver ETFs are still trading below their trendlines. For instance, SLV is 2.2% below its 50-day simple moving average and 4.3% below its 200-day.
iShares Silver Trust
For more information on the silver market, visit our silver category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.