Investors' Apathy for Silver Is Creating Another Buying Opportunity

Silver seems to be unpopular with all investors these days. It’s unpopular with silver bugs because more than half of the demand for it now comes from industrial applications. And it’s unpopular with everyone else because of recession fears.

Right now, the obvious safe-haven metal is gold, and gold producers are doing great financially. At the same time, they are incredibly undervalued relative to the price of gold.

Silver, on the other hand, has become an industrial metal to a large extent, and many silver producers are barely making money at these price levels. Even worse, we could be going into a recession, and industrial demand could go down.

If this level of disinterest and selling continues, we might be getting another opportunity to buy silver stocks at low valuations.

Earlier this year, silver stocks were incredibly hated, and we got a great opportunity to buy them. Since then, some of the stocks went up ~200% in just a few months. This shows the massive potential if you buy at the lows when no one wants them.

However, it was difficult to buy at the time because sentiment was so low, and everyone was negative on silver. Sentiment is starting to get bad for silver again, but I think investors are thinking too shallowly about silver and focusing too much on a potential hit to industrial demand without factoring in some of the potential surprises to the upside from here.

I recently interviewed Peter Krauth of the Silver Stock Investor to delve into the fundamentals and get a better grasp of the thesis. After that interview, I think the outlook for silver might not be as gloomy as many investors think.

Let’s go through a couple of the factors that could lead to positive surprises that I think investors are not considering.

Let’s start with industrial demand.

Peter talked about silver use cases such as electronics, solar panels, and more. We will likely see a drop in demand from these applications during a recession, but that’s unlikely to last forever. These things wear and tear and there is so much technological innovation happening in these applications that it might make sense to replace or upgrade for a variety of reasons.

Peter also made a great point that any stimulus that might come in a recession will likely go into themes like renewable energy and increased electrification of the economy, both of which require silver.

Ultimately, I think industrial demand might be stickier than most people think, but that remains to be seen.

What about investment demand?

I think investment demand has a lot of optionality to the upside from here.

In a world with increasing geopolitical tensions and distrust between various countries and currencies, investment demand might very well pick up the slack from lower industrial demand, at least to some extent. Especially now, when gold prices have run up quite a bit and silver prices are down again, the case for buying silver for investment purposes has become very compelling.

What about supply?

Right now, we are in a deficit for silver and demand could drop 15% from here, and we’d still be in deficit. The fact is, demand has been growing pretty substantially, and mine supply and recycling have been more or less flat for a long time.

It’s not easy to open up a mine today, and as Peter discussed  in the interview, there are multiple factors that make it very challenging to respond to the current supply deficit. A recession, with tighter capital markets, likely won’t make that any easier. Also, if we’re concerned about a recession, a lot of mine supply comes from other base metal mines that are also economically sensitive.

So, what does all of this mean?

In the short term, there is downside risk because investors are focusing on industrial demand and that it likely drops in a recession, so they will likely continue selling.

However, I think investors are just not considering all of the things I mentioned above which might be positive surprises for silver to the upside. If we go into a recession, I think it’s entirely possible that industrial demand goes down and primary or secondary silver supply goes down with it. At the same time, investment demand could pick up the slack.

No one really knows what will happen, but investors are ready to paint a very pessimistic picture and sell rather than take the chance that any of the upside scenarios might happen. I think we may get a good opportunity to take the opposite side and start scaling into some positions soon. My goal is to buy the good silver companies when they are cheap and hold them for a long time, and the best time to do so is when no one wants them.

Full disclosure: I already own shares of a couple of silver producers and developers that I bought early this year, and I intend to add more if the current drawdown continues and they sell off substantially.

If you would like to listen to my interview with Peter Krauth, check it out here. 

Thanks for reading!

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Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions.