At Nicoya Research, we are expecting a breakout year for silver in 2021. In fact, we think the silver price will easily make a new high above $50 with the potential to challenge $100 within the next year or two.
While the fundamental focus for silver is usually the investment demand, jewelry demand, and its use case as an inflation-hedge, we see the industrial demand component being a key driver of the higher price over the next few years. Demand growth in EV batteries and clean energy applications is expected to tick higher, partially fueled by a new US administration that is friendlier toward these sectors and likely to spend more aggressively on infrastructure projects and clean energy job creation.
Not only is the industrial demand case strong, but the higher levels of stimulus, money creation, and financing big government spending through debt, is likely to increase downward pressure on the US dollar. We have already seen unprecedented levels of stimulus to combat the pandemic, but another $2 trillion is likely on the way. And it is important to remember that the government does not actually have this money to spend. They are creating new debt to do this, piling it on top of already record levels of debt and pushing the burden to future generations.
This is all incredibly bullish for silver. It is unfortunate for the country, but we have to make the best of the situation by protecting our hard-earned wealth and purchasing power.
Adding to the bullish case is the fact that the total silver supply fell 4% in 2020. Total demand dipped by a lesser amount (3%), but we have seen record levels of inflows to silver funds and record physical demand over the past week, driven partly by a movement to create a silver short squeeze. Most bullion dealers are completely out of stock for silver bars/coins and those that have inventory are selling for over $40/ounce compared to the spot price of $27. The divergence has never been so severe, yet it is hard to arbitrage as they set the rules and force cash settlement.
We aren’t sure if investors can force a silver short squeeze, but we believe prices are heading higher no matter if this occurs or not.
At Nicoya Research, we are forecasting that the 7% decline in industrial demand for silver in 2020 will turn into an increase in industrial demand in 2021. These supply/demand fundamentals will become clearer over the course of the year, so we think it is best to be ahead of the curve and buy while prices are still so low.
There is also the fact that while gold and most commodities have shot to record highs, the silver price is still roughly 50% below the all-time high of around $50 per ounce. The table below shows how badly silver has lagged, which suggests it is undervalued and overdue for a big rally.
We just published one of our top silver stock picks for 2021 and the rationale for this trade. We don’t usually share our individual stock picks publically, but we believe there is a huge opportunity in this name over the next few years. And we have seen a major influx of new silver investors this week, so want to share this silver stock pick to give new investors to the sector a leg up.
Please keep in mind that we believe it is best to first hold physical silver in your possession. Not only does is this the best form of insurance, but it takes supply off the market to pressure short-sellers and have a greater impact on the price over time.
The reason that we are bullish on silver miners is that they can offer investors leverage of 2x to as much as 10x during strong bull runs. This is because the companies that mine silver have a large fixed-price component to overall costs and most of the price gains go to the bottom line.
To illustrate how this leverage can work with silver mining stocks, here is an example. If a company mines silver for $10 per ounce and the price is $15 per ounce, they make $5 per ounce sold or a 33% profit margin. But when the price of silver doubles (+100%) from $15 to $30, the profit margin for the silver miner goes up way more than 100%. It goes from $5 to $20, a 4x (300%) increase in their profits. So, when the silver price rises by 100%, the profitability of the miners rises by roughly 3x that amount (300%).
This is why we advocate for not only holding physical silver, but also taking advantage of the leverage available from well-run silver mining companies. You can buy shares in some of the largest silver miners, but we think their upside is more limited than the small-cap, high-growth names. Furthermore, they have increasingly decreased their share of revenue that comes from silver, shifting toward gold and other metals.
The table above shows the % of overall revenue coming from silver production from some of the leading “silver” miners.
In fact, there are only a handful of silver miners that get over 50% of their revenue from silver these days, and our silver stock pick in the report below happens to be the company with the highest percentage or closest to a pure-play silver miner. They also happen to have some of the highest silver grades in the industry, more than double most of their peers.
In the FREE report below, we provide a quick snapshot of our bullish case for this silver stock in 2021 and the years ahead. If you value our research and approach, you can get access to our full portfolio of 20+ mining stocks by signing up for the top-rated Gold Stock Bull newsletter.
Click the image below to download our #1 Silver Stock Pick for 2021!