“Silver and silver producers have been fundamentally undervalued for many years, despite a supportive macroeconomic environment for precious metals and growing industrial demand for silver,” according to recent commentary put out by Baker Steel Resources Investment Trust Ltd (LON:BSRT).
The UK-based investment company has long had significant exposure to silver through long-standing interests in Russia and an ongoing relationship with Russian mining giant Polymetal (LON:POLY).
“Investor sentiment towards silver is improving,” added Baker Steel, “yet there is much room for recovery with silver having lagged gold for some time. The rising silver price highlights the positive outlook for silver miners, many of which are recovering well from COVID-19 related disruption to the industry and are benefitting from margin expansion.”
Baker Steel’s funds have held an overweight position to silver producers in recent months and the company continues to see substantial upside potential in the sector, particularly through exposure to high-quality silver producers which have strong margins and are well-positioned to benefit from higher silver prices.
Silver rose to just under US$30 per ounce earlier this week as the metal became the focus of the retail trading phenomenon in which small-scale investors, fuelled by social media and online forums, bought companies perceived to have been the targets of short selling by institutions.
Major silver ETFs experienced record inflows while a surge in purchases of physical silver left many dealers out of stock, as investors piled into the metal.
While the impact of this surge in retail buying on the silver price was less extreme than for an individual stock, like GameStop, due to the deep and liquid nature of the silver market, the metal’s rapid price movements of the past few days does demonstrate that momentum can build quickly, and the potential for higher prices is real.
“Silver has appeared undervalued for some time while the outlook for the metal is increasingly positive, backed by two key demand drivers,” said Baker Steel.
“The first of these is the recovery of the precious metals sector, driven by a range of macroeconomic factors, most notably low and negative real interest rates, rising debt levels and unprecedented levels of economic stimulus enacted by policymakers in response to the COVID-19 crisis.”
Baker Steel also highlighted the long standing mechanism for valuing silver: the gold-silver ratio.
“Having lagged gold for much of the past few years and with the gold-silver ratio having reached a historic level of around 120 ounces of silver to buy one ounce of gold during early-2020, silver’s price recovery is perhaps overdue,” the company said.
But industrial demand also plays a part.
“Industrial demand already accounts for over 50% of silver demand and a significant potential growth area is the metal’s applications in green technology, most notably in the manufacturing of photovoltaic cells for use in solar energy,” said Baker Steel.
“With a positive outlook for silver both from near-term market momentum and longer-term fundamentals, it is our view that silver equities are well-positioned to offer operational leverage to high silver prices in the weeks and months ahead. Across Baker Steel’s UCITS funds we have held an overweight position to silver producers in recent months, with around 20% exposure in our flagship precious metals equities strategy at present, and we consider there to be substantial upside potential ahead for this sub-sector of the industry.”