A few weeks ago, I published an in-depth article on Investing in Uranium. That issue received terrific feedback (thank you!) and I got requests to expand my analysis into other precious metals.
So today I’m following up with an issue on Silver.
Silver is a deeply misunderstood asset. When investors discuss silver, they often treat it as nothing more than “gold’s little brother.”
But this is a mistake. Although both metals are influenced by the same factors, the silver market is unique, fascinating, and worth understanding on its own.
Today, I’ll cut through the noise and focus on the facts, exploring everything you don’t know about silver.
The first half of this issue is free:
- Understand why spot silver prices have climbed over 20% this year alone (and could be set to go much higher)
- Find out which high-tech industries are causing a silver demand boom.
- Why silver supply cannot keep up with demand (and what the decline of film photography has to do with it)
- Why most silver miners don’t actually care about the metal!
You’ll need the All-Access Pass to unlock the second half 🗝
- 🗝 Why one underreported trend weighing down silver prices may be ending.
- 🗝 How much silver is in vaults, how much is left to be withdrawn, and how long this supply is expected to last (← hugely important)
- 🗝 The bear & bull case for investing in silver right now
- 🗝 The overlooked considerations on both sides
- 🗝 The best (and worst) ways to invest in silver
Let’s go 👇
Note: Since you have the All-Access Pass, you can access the full issue.
Table of Contents
A brief monetary history of silver
You’re probably familiar with the gold standard, a method of stabilizing the value of a currency by pegging it to a fixed exchange rate with gold.
But for almost all of recorded history, gold wasn’t the main precious metal used to back currencies – silver was.
Silver is much more common than gold. About 19x more common..
That means if you’re using precious metals as a physical part of your currency (in the form of coins), silver is more feasible for everyday transactions.
So for almost 5,000 years, silver coins were the primary means of exchange for the world’s leading civilizations:
- As early as 3000 BC, the ancient Sumerians of Mesopotamia were transacting with the silver shekel.
- The drachma, usually made of silver, was used by ancient Greek city-states since the 500s BC.
- The Spanish dollar, popularly known as a piece of eight, was a silver coin that became the world’s first international currency in the 1500s (and remained legal tender in the US until 1857).
By the early 1800s, most industrialized nations either operated on a silver standard (like many Germanic states) or a bimetallic standard of both gold and silver (like France and Britain).
But eventually, gold began to win out — all thanks to a calculation error by one of the smartest mathematical minds in history.
Isaac Newton accidentally created the gold standard
Among other accomplishments, Sir Isaac Newton served as the Master of the British Royal Mint from 1699 up until his death in 1727.
In this role, Newton made a fateful recommendation to Parliament, advising them to adopt an updated exchange rate between the country’s gold and silver coins.
But here’s the problem: Thanks to some faulty data from other countries, Newton accidentally overvalued gold and undervalued silver!
Soon, silver began to flow out of the country as early arb traders sought to profit from the metal’s lower value in Britain and higher value in other countries (a particular case of Gresham’s law).
Without enough silver coins to go around for domestic transactions, Britain de facto adopted a gold standard after Newton’s recommendation and formally adopted it in 1819.
To have a common trading currency with one of the world’s wealthiest and most industrialized nations, other countries soon followed suit (a particular case of network effects).
Despite some short-lived attempts to reintroduce monetary silver, the metal was forever relegated to industrial use and investments.
By the late 1800s, the international gold standard had taken hold, lasting in one form or another until 1971 — which was the beginning of the end of the Bretton Woods System.
Why is the silver market booming?
While the metal has fallen out of favor as a monetary policy tool, silver is seeing a resurgence today as an investable asset.
For most of the recent past, silver has been trading range-bound between $20-$30/oz.
But since the start of this year, prices have been testing the upper end of that range, eclipsing $30 multiple times.
At first glance, silver’s performance might appear to be nothing more than an after-effect of gold’s performance.
Spot gold has climbed almost the same amount — 11% annualized over the past 5 years, and 21% in 2024.
It’s certainly true that similar factors drive silver and gold prices, as evidenced by the mostly positive correlation between the two metals.
But brushing off silver’s performance as riding gold’s coattails misses the vastly different underlying demand structures for the two metals.
Silver demand is mostly industrial (unlike gold)
Gold demand comes from two places:
- Financial markets, including investment purchases and reserve purchases by central banks.
- And the gold jewelry market.
That’s about it. These two markets account for 93% of global demand for gold. Industrial demand makes up the difference – just 7%.
Gold is truly a precious metal, with few ‘real’ purposes. But this isn’t the case for silver. In fact, silver’s versatility and value make it an attractive option for investors, so much so that you may want to consider a 100 oz silver bar as a potential addition to your portfolio.
In 2023, about 60% of demand was industrial. Investment, jewelry, and silverware make up the minority 40%.
This demand structure is part of what makes the metal so intriguing. Unlike gold, silver is a practical hybrid metal — part precious and part industrial.
What’s more, industrial demand for silver is growing. It climbed 11% from 2022 to 2023, and is forecast to rise another 8.5% this year.
Demand growth mostly comes from two technology trends that are crucial to the clean energy transition.
Solar & EVs are driving demand growth
Silver has high industrial demand because it’s practical. It’s the single most electrically conductive metal we know of, with an unparalleled ability to transfer electricity.
As a result, silver has huge applications in electronics and technology.
And in recent years, two specific technologies have been driving silver’s demand growth:
- Solar panels, where silver is used as a conductive paste on silicon wafers.
- And electric vehicles, where virtually every electrical connection is coated with silver.
The EV industry accounts for a small but substantial 2.9% of global silver demand (up from basically nothing a decade ago.)
But the solar industry is really the main player here. Silver plays a vital role in producing solar cells that generate electricity.
Between 2013 and 2023, silver demand from photovoltaics climbed about 14% annualized. Today, the solar industry accounts for over 16% of global silver demand.
As we discussed in our State of Solar issue, solar energy has truly cemented itself as the dominant form of renewable energy, with new solar installations growing rapidly.
Solar energy has proven cost-effective and versatile. The technology accounted for over 73% of all global renewable energy additions in 2023.
This trend is highly bullish for silver. But there are some nuances:
- Silver is an expensive component of solar panels, especially considering recent price increases.
- As a result, the solar industry has found ways to become more resource-efficient in terms of silver, a trend that some forecasts think will accelerate.
- But at the same time, next-gen solar panels are actually more silver-intensive, not less.
The current industry-standard PERC solar panel uses 10mg of silver per watt compared with 13mg and 22mg in potential future models (TOPCon and Heterojunction, respectively).
Ultimately, we don’t know how solar or other energy transition technologies will evolve.
But given current panel installation and EV adoption rates, it’s hard to imagine silver demand declining anytime soon.
Silver supply has a structural deficit
Silver demand growth is just one side of the equation. If long-term supply growth keeps pace, we shouldn’t expect significant price appreciation.
But as it stands, silver supply appears unable to match demand.
The silver market hasn’t been in balance since 2020 — the last time supply exceeded demand.
Since then, the industry has been in a persistent and substantial deficit. In 2023, this deficit amounted to 5,700 tonnes, about 22% of total annual silver mine production.
And barring structural changes to how the silver market works, this deficit won’t disappear anytime soon…
Silver is naturally rare
In our recent issue on investing in uranium, I described how uranium’s unequal geographical distribution and diplomatic sensitivity lead to “artificial” rarity.
Uranium itself isn’t all that rare, so supply concerns are mostly about important stuff like geopolitics and processing capacity.
Silver, however, is rare as hell.
Yes, the metal is fairly well-distributed around the world, with no country producing over a quarter of global supply (Mexico leads the way, with China, Russia, Australia, and the US all in the top ten).
And silver processing isn’t tough at all — humanity has been doing it for thousands of years.
But silver is 36 times less abundant than uranium (in the earth’s crust)
(Earlier, I mentioned that silver is less rare than gold. But that’s a relative statement. In absolute terms, there’s nothing artificial about silver’s rarity.)
What’s more, silver is rarely found on its own.
Instead, most of silver’s abundance is found in ore, where it’s a small component of a larger compound, mostly made up of zinc & lead.
And this simple fact has huge consequences for how the silver supply chain works.
Silver miners don’t really care about silver!
Because silver is rarely found on its own, over 70% of silver production is a byproduct of other metals.
That’s right – the vast majority of new silver supply comes from miners who aren’t even primarily interested in silver.
Sure, extracting silver from the ore they dig up is a nice extra revenue stream. But these miners are mostly focused on more lucrative metals like lead, zinc, and copper.
This means that most silver suppliers have little incentive to respond to price changes in silver. (In economic terms, silver supply is relatively inelastic).
That helps explain why silver production growth has barely nudged over the past decade, despite rising demand.
Back in 2013, global mines produced 23,240 tonnes of silver. By 2023, that figure had grown to just 23,544 tonnes. This is just a 1% total growth in supply in 10 years.
Silver supply may be tied more closely to price changes in lead and zinc than to price changes in silver itself.
What’s stopping silver from climbing higher?
Given growing demand from high-tech industries, limited primary mine supply, and structural market deficits — you have to ask why silver prices haven’t climbed more.
11% annualized growth over the past 5 years is strong, but it’s not outstanding compared to other alternative asset returns.
Here’s the thing about the silver market: it’s actually quite tiny compared to other asset classes.
As of 2024, the volume of gold traded daily on Loco London (the world’s largest spot precious metals exchange) averaged $43 billion.
In comparison, silver only averaged about $5 billion, roughly 12% of gold. That’s lower than some single stocks on major exchanges.
Small markets are often volatile markets, and silver is no exception. It doesn’t take much to push silver’s price around. Silver has been called the devil’s metal, since its notoriously volatile price can burn investors with swift declines.
And over the past few years, several trends have coincided to weigh on silver’s price appreciation.
One of the biggest has been the gradual drawing down of silver held in vaults.
Drawdowns continue on vaulted silver inventories
When traders buy and sell silver on a spot metals exchange (like Loco London or the Shanghai Gold Exchange), they’re not actually swapping physical metal for cash.
Instead, they’re buying and selling receipts designating ownership of specific silver inventories held in an exchange-registered vault.
If you need the underlying metal, though, you can organize physical withdrawal from these vaults.
Depending on prices, this can create an arbitrage opportunity. You could buy and withdraw metal from the spot exchange while selling and delivering it to an industrial user.
If this arbitrage were happening, we should expect to see vault inventories decline.
And that’s exactly what has happened over the past few years:
In 2022, for example, the total volume of silver withdrawn from global vaults was equivalent to about 45.5% of silver mine production that year – an enormous amount and enough to cover that year’s market deficit.
Because vault withdrawals aren’t counted in traditional silver supply data, this trend has gone seriously underreported, considering the magnitude of impact it could have on prices.
Crucially, though, not all of this silver is eligible to be withdrawn!
Physical silver investment funds need to be backed by…well, physical silver. Metal held in vaults on their behalf can’t just be withdrawn if an arbitrage opportunity is spotted.
Adding up the silver holdings (as either directly stated or as inferred by prices) of some of the most popular of these products (SLV, SIVR, PSLV, CEF, PHAG, SSLV and the various ZKB funds) comes to roughly 26,240 tonnes.
All told, there may be less than 12,000 tonnes of silver eligible for withdrawal remaining in global vaults, enough to cover about two more years of deficits at current levels.
And that amount is almost certainly an underestimate, considering:
- Rising demand is causing deficit levels to increase,
- We didn’t account for smaller silver funds with physical holdings,
- And plenty of non-fund silver investors likely aren’t willing or able to take advantage of industrial arbitrage opportunities either.
Vault inventory has been able to help manage silver supply deficits so far, but this inventory cannot last forever.
I believe vault inventory drawdowns could help contribute to significant price appreciation.
The dollar has been very strong
Another nuanced, but nonetheless important, factor weighing on silver has been the notable strength of the US dollar.
Historically, silver has exhibited a negative relationship with the dollar. There are three structural reasons this is the case:
1) Silver is a commodity
Because the dollar is the global reserve currency, most commodity trade is dollar-denominated.
This means that, for international buyers, commodities like silver become relatively more expensive on a currency-adjusted basis. This reduces demand.
2) Silver is a non-yielding asset
When the dollar strengthens, it tends to result from rising interest rates.
In a higher interest rate environment, non-yielding investments like silver are less attractive than yield-producing investments like private equity and debt financing,
If rates come down, assets like silver become more attractive.
3) Silver is a safe haven asset
Like gold, investors tend to buy silver during times of uncertainty and sell them during boom times.
A stronger dollar tends to occur during expansionary periods when rates are rising and the US economy is growing, which also tend to be the periods when interest in safe-haven assets is low.
To measure the strength of the dollar, we can look at the DXY index, which tracks the dollar’s value against a basket of currencies in the FOREX market.
Notably, supply and demand trends have been strong enough to push up silver’s price despite general appreciation in the dollar.
But in the very near future, the dollar’s strength could start to diminish.
Most notably, weakening inflation trends have given the Fed more room to cut interest rates to support the US economy. Lower rates should translate into a weaker dollar.
In addition, a Trump presidency could bring policies specifically designed to weaken the dollar, long a crucial part of his economic agenda.
Just as the dollar’s strength has probably weighed on silver prices, any coming dollar weakness could be an extra tailwind for the market.
How to invest in silver
Look, there’s still plenty that could go wrong for silver investors.
Price appreciation might promote a transition away from the metal in EVs and solar. Unexpected supply increases could come online. And rapid disinvestment in silver funds could potentially unlock new vault supply.
But given the structural deficits we’ve seen and the steady erosion of trends that have kept silver prices in check, the investment rationale does look quite strong.
If you want to invest in the metal, there are a few different ways to do it.
Buy physical silver
The most obvious way is to just buy real, physical silver.
Options include silver bars, jewelry, or the famous silver dollar coins from the US Mint.
This probably isn’t the best idea, though.
The most obvious reason is that you’re almost always paying a premium and selling at a discount due to lack of liquidity.
But for US investors, another reason is taxes.
Barring specific exceptions, the IRS tends to treat physical silver as a “collectible,” meaning the all-important long-term capital gains benefits do not apply!
If you hold a collectible for over a year and sell at a profit, it’ll be taxed like income, up to a maximum tax rate of 28% (rather than the 20% max. long-term capital gains rate).
Surprisingly, this tax issue also extends to many physical silver funds.
Physical silver funds
Most physical silver funds available to US investors (including those we discussed earlier) are structured as trusts.
Trusts legally entitle their owners to a pro-rata share of the underlying assets.
That means even though you might be buying and selling a silver trust in your brokerage account, rather than handling physical silver, the IRS still treats it as a collectible.
Physical silver funds are a great way to track the spot price of silver – but you need to be aware of this tax issue to decide whether they’re the right choice for you.
Silver fund options for US investors include:
- PSLV from Sprott (0.60% fee)
- SLV from BlackRock iShares (0.50% fee)
- SIVR from abrdn (0.30% fee)
And other international options:
- PHAG from WisdomTree (European investors, 0.49% fee)
- SSLV from Invesco (UK & Ireland only, 0.19% fee)
- And the ZKB funds from Swisscanto, which come in several different currencies
Silver mining companies
One possible way around collectibles taxation is to invest in silver mining companies.
Now, the problem with this approach is that many of the most important silver mining companies are also heavily involved in mining other metals (for reasons we explored earlier).
This means that their share prices will only roughly approximate spot silver prices.
Using SLV to represent spot silver & two popular silver mining ETFs (SLVP from BlackRock and SIL from GlobalX), we can see a significant divergence between spot and miner performance.
Another ETF to explore is SILJ from Amplify, the only fund on the market specifically targeting small-cap silver miners.
You could also look into investing in individual silver mining companies, including:
- Pan American Silver Corp (NASDAQ:PAAS)
- Hecla Mining (NYSE:HL)
- Peñoles (BMV:PE&OLES)
Silver futures
Finally, you can get exposure to silver prices through silver futures, which trade on the CME.
Although silver futures aren’t taxed as collectibles, the tax treatment of futures in the US isn’t exactly simple either.
Generally speaking, trading silver futures has more beneficial tax treatment than trading physical silver.
But…
There are also some headaches with using futures markets to get exposure to spot prices, including continuously rolling front-month contracts, the risk of trading contango markets, and the possibility of getting margin called due to the inherent leverage involved in futures.
But we’ll save those for future issues.
One final note on scrap silver…
One source of supply that could be more reactive to price changes is recycled silver, where fabricated products are scrapped, and the silver components inside are extracted for new use.
In 2023, recycling accounted for about 18% of global silver supply.
It’s true that a rising silver price generally induces more silver recycling, which could weigh on spot prices in the future.
But this relationship isn’t as strong as you might think.
At ~0.30, the correlation between silver prices and recycling levels is positive, but far from perfect.
There are a few reasons to think that scrap silver supply will continue to respond imperfectly to prices:
- Fabricated silver is often held for sentimental reasons (silver jewelry has high sentimental value, etc.)
- The share of scrap coming from photography continues to decline as a lagged effect of the rise of digital cameras. Scrap supply from this source has already fallen by half since 2012.
- The amount of silver contained in industrial products is often too small to justify recycling on its own, meaning that the prices of other components can have a stronger influence.
At the same time, the amount of silver available in installed solar panels (many of which are rapidly becoming obsolete) and a push towards increased recycling may boost the supply of scrap silver on the market.
Overall, silver recycling will continue to weigh on silver prices a bit. But there’s definitely no reason to think this source is sufficient to overcome the deficit on its own.
That’s it for today.
Reply to this email with comments. We read everything.
See you next time,
Brian
Disclosures and holdings
- This issue was written & researched by Brian Flaherty, and edited by Stefan von Imhof
- Neither author currently has holdings in silver, or any companies mentioned in this issue.
- After researching this issue, Stefan plans to make a small, long-term investment into silver — likely through one of the silver mining companies mentioned in this issue.
- Altea has no silver holdings.
- This issue was sponsored by Arta Finance
- This issue contains an affiliate link to TradingView
- To read the full issue you need the All-Access Pass
