Should wealth managers keep riding the silver train?

To borrow the immortal words of the Lone Ranger: “Hi Ho, Silver. Away!”

An ounce of silver cost just $30 a year ago. At last check it was comfortably over $100.

But how much longer will advisors stay along for the ride?

Silver is generally considered an industrial metal, one that is intricately connected to the manufacturing process of goods like solar panels and cars. Nevertheless, much like gold (now on its own ecstatic run past $5000 an ounce), silver is also used as a hedge against inflationary pressures and dollar-based currency risk.

Kevin Thompson, founder and CEO at 9i Capital Group, for one, believes silver will likely retreat in coming weeks after its big move higher. But in his view the “big bogey” is how much silver is currently being consumed in regard to weapon manufacturing. 

“A lot of that is classified of course, but if governments around the world are spending more on weapons and military, you can see more demand coming. There also may be a peg underneath the asset as central banks may be hedging currency risk in assets such as gold and silver, but once they have had their fill, who is the next incremental buyer?” said Thompson. 

Stressed Thompson: “The gains in silver have been made, and you just don't want to be the one holding at the top tick of the market if global tensions quell.”

Instead of buying coins or bars for clients, Thompson suggests using ETFs to gain exposure to the asset class while maintaining liquidity. He keeps his allocation to precious metals at about 5% of client portfolios yet admits that it could grow and require rebalancing going forward.

Anita Wright, chartered financial planner at Ribble Wealth Management, sees silver above $100 as a loud signal that the paper market is being stress-tested by physical demand. She points out that a squeeze was visible in Comex (trading platform) because as the price rose, silver volume eased, which in her view is “consistent with shorts finding it harder to stay in the game.” 

“For ordinary investors, the real issue is currency debasement: treat metals as insurance, avoid leverage, favor allocated and fully-backed exposure, and size positions so you can endure pullbacks," Wright said.

James Cordier, founder of OptionSpreaders.com, sees first-time investors of all sizes entering this space as the main catalyst moving silver prices higher, many of which are previous owners of crypto. Furthermore, he thinks many high-net-worth investors who shunned silver as a “boring base metal” with tons of oversupply now find this new bull market something they should add to their portfolios.

“Rarely do you witness an asset making record highs bring in huge sums of new money, but that’s exactly what is happening,” Cordier said.

When it comes to his outlook for silver going forward, OptionSpreaders.com’ Cordier believes new buyers are feeling confident there will be an end-user to buy the silver back at whatever price, so the melt up may continue for a while longer.

Emphasized Cordier: “While this historical run has made many traders eyes glaze over, we feel the story may have several chapters yet to be written.”

NOT A SUBSTITUTE FOR GOLD

While silver and gold have enjoyed massive gains in the past year, Aakash Doshi, head of gold strategy at State Street Investment Management, reminds clients that silver and other precious metals like palladium and platinum are not substitutes for gold, which he considers a core strategic asset in most balanced portfolios. In his view, they are less liquid and significantly more volatile.

“Silver and PGMs are not pure precious metals and greatly depend on cyclical industrial demand to absorb supply. Gold is unique in that it has pro-cyclical, counter-cyclical, and importantly non-cyclical sources of demand. This damps gold’s downside volatility and helps lifts its price floor more sustainably,” according to Doshi.