With silver prices soaring, mining equities and the related ETFs are joining the party. For example, the Global X Silvers Miners ETF (NYSEArca: SIL) is higher by more than 13% just this month.
SIL, the largest silver miner-related ETF, tries to mirror the Solactive Global Silver Miners Total Return Index, which is also comprised of global silver miners. The fund is up nearly 18% year-to-date. A variety of factors, including rampant monetary easing by global central, are boosting precious metals and mining stocks.
“Fast forward through the first half of the year, and the Fed is ending its balance sheet reduction program, and markets are pricing in multiple rate cuts through the end of the year,” said Global X in a recent note. “The shift to more dovish central bank policies is occurring outside the US as well. Since April, New Zealand, India, Malaysia, South Korea, and the Philippines have all cut rates, along with a host of other countries.”
A more accommodative Federal Reserve would bolster the case for silver because higher interest rates make non-yielding assets like commodities less attractive.
Digging Deeper With SIL ETF
SIL, which debuted in April 2010, has nearly $454 million in assets under management and holds 24 stocks. The fund is concentrated as its top four holdings combine for about 48% of its weight. Adding to the near-term case for silver and SIL is that the white metal is attractively valued relative to gold.
A standard valuation metric to assess whether silver is undervalued relative to gold is the gold/silver ratio. A high ratio indicates silver could be undervalued,” according to Global X. “Historically, since 1998, the gold/silver ratio has averaged a level of around 64. As shown in the chart below, although silver has rallied recently, the ratio remains well above historical levels at just below 90. This could be an indication that within the precious metals complex, silver may be more of a relative value play than gold.”
For adventurous investors, mining stocks and ETFs make sense because when the underlying metal rallies, those assets can deliver even larger gains.
“Mining stocks and ETFs that hold them are traded as stocks, but miners are often leveraged to the price of the underlying commodity which can make them more volatile than the physical commodity itself,” said Global X. “However, for those with a bullish outlook, mining stocks linked to the underlying commodity could be a high risk/reward option.”
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