Senior Portfolio Manager Maria Smirnova joins host Ed Coyne for a comprehensive analysis of all things silver. With its dual qualities of being a monetary metal and an industrial metal, silver occupies a unique position in the investing landscape. Maria and Ed examine how silver fits into a world of unprecedented government debt on one hand and increasing industrial usage on the other. Maria provides insights on the supply-side dynamics of silver, the current state of the gold/silver ratio, and the inherent complexity of evaluating mining stocks.
Hello, welcome to Sprott Gold Talk Radio Season 1, Episode #3. I'm your host Ed Coyne, Senior Managing Director at Sprott Asset Management. Today we have a special guest, Maria Smirnova, Senior Portfolio Manager at Sprott, to talk about the value of silver. Before we go into that Maria, spend a few minutes talking about your background and your current day-to-day role at Sprott, so our listeners can get some context on how you deal with silver and all the other metals on a daily basis.
Hi Ed and hello, everyone, and thank you for having me on this chat. I'm really excited to talk about silver. I've actually been at Sprott for quite a long time, since 2008, and over time my role has evolved. To summarize, I am a portfolio manager and my day-to-day activities are working with the rest of the Sprott Gold Team, managing our suite of mining equity products. We primarily focus on gold and silver.
I spend significant time reading about the physical metals, and my specialty is silver. But I also do a lot of work on gold as well. We have products both in the United States and in Canada, and as such, I spend a lot of time meeting with various companies. Before COVID happened, we spent quite a bit of time visiting different properties. We do invest globally, so we have companies based in Australia, we have companies with mines in Africa and several companies in Latin American. My job is quite fun because I get to speak with many different individuals, and I learn every day.
That's great, Maria. Speaking of COVID, 2020 provided a strong year for silver, which was up over 47%. It was a tremendous year for the metal This year, silver remains top of mind, albeit the year-to-date performance has softened. Could you provide some color on what's really happening now in the silver market?
I think what's happening is applicable to both gold and silver. Last year, with the shock of COVID, governments all over the world started spending money trying to cushion their economies from the economic shock and that helped gold and silver propel higher. Since then, we've had a rollout of vaccinations around the world to various degrees, and particularly in the United States, and that has contributed to a view in the market that the economy will recover. In fact, there's been a change in expectations of economic growth, particularly in the United States and that’s contributing to strong general market performance. It’s also resulted in a strengthening of the U.S. dollar and a rise in long-term U.S. interest rates. We see a strong relationship between the price of gold and silver versus long-term interest rates, particularly in the United States. Last year, interest rates dropped rapidly.
This year, we've seen a bit of a reversal. We see that sentiment has dampened for gold and silver. We do see this as transitory because the bottom line for us is that there's still plenty of stimulus in the system. President Biden is proposing various measures to continue to spend money. We know about the infrastructure bill. We've just had a $1.9 trillion stimulus package enacted and we're already talking about more, and that’s all is being financed through debt.
The U.S. is in both trade and fiscal deficits and the deficit really grew last year. It's continuing to be quite large. All the spending we're seeing is being financed through debt. We do talk about fiat currency debasement and gold and silver are great hard assets. To us, this is where the value in the metals comes from. In addition, silver is benefiting ultimately from the reopening of the global economy. About 50% of silver use is in industry. That's contributed specifically to silver's outperformance and silver has been outperforming gold. I think that’s because of that dual nature of it being a monetary asset and an industrial metal as well.
We hear often about the demand for silver, whether it's as a commodity or as a natural hedge in a portfolio, but you don't read too often about the supply of silver and where silver actually comes from, how it's being produced and how impactful recycling is in the silver market. Can you touch a bit on the supply side of silver? How many ounces are being typically produced in a year? How does that happen? Is recycling impactful to the overall supply of silver? Just walk the listeners through that and help them understand the supply side of silver as well as the demand.
The total silver market is about one billion ounces, plus or minus, but I like to use that as a round figure, and over 80% of silver comes from mine supply. The other part is scrap supply. In fact, scrap used to be a higher proportion of the silver market but has dropped within the last five years. If you want to be a little more precise, scrap actually constitutes about 16-17% of the market right now.
The fact is that scrap supply has dropped in importance. Silver was $50 an ounce back in 2011. Now silver is $25-26 an ounce, and it dropped to as low as $12 an ounce last year. Scrap is price sensitive. When the silver price declines people don't want to recycle their silverware, their spoons and forks and jewelry as much as they used to. Another driver of this scrap supply drop has been photography. Photography has been diminishing as we go digital. We used to recycle a lot of x-ray film and as we work through that supply, that's also contributed to a decline in scrap.
On the mine supply side, if you think about Mexico and Latin America, those are two areas that are big suppliers of silver. There are many silver mines and also byproduct mines, where silver is mined together with either gold or copper or lead and zinc. It is quite a diverse supply story for silver there.
What about the price itself? People look at it in many different ways, including the gold/silver ratio. What about how affordable silver is relative to gold? Why are they priced so differently? Silver has traditionally been viewed as the affordable gold. You hear that term a lot. Some people even say it's the poor person's gold. From an investor standpoint, silver seems to be gaining traction over the last five to 10 years. You've already commented on that from a commodity standpoint and from a needs standpoint. Walk us through that differential between $25-26 for an ounce for silver versus $1,700+ for an ounce of gold. Why in your mind is that difference or that gap in pricing so wide between silver and gold when it comes to pricing?
That's a great question and it's question generating much debate in the market. In the silver market, we produce about a billion ounces a year, but we produce about 150 million ounces of gold a year. If you look at that ratio, it's about 6.7 to 1, but gold trades 65-68 to 1 versus silver right now. Silver, in my mind is still much more undervalued than gold is.
Talk about some of the key benefits we're seeing today with modern technology, with autonomous driving cars and reflective technology and solar panels and so forth. Explain some of the key benefits of silver that some of our listeners haven't thought about in the past and help them understand the value of silver today over and above diversifying a portfolio. Where are you the most excited as an investor in silver? Where are you seeing the applications grow over the next three, five, ten years?
About half of silver goes into industrial uses. Silver has been used in industry for a century. Besides being used as a monetary instrument in coins, silver has tremendous biocidal properties. Even a hundred years ago we would use silver for those properties. As a kid, I remember putting a silver spoon in a bucket of water so that we could drink it later. That’s a simple example. Then we came to a time where it was greatly used in photography and as we've gone digital, that has declined. So there have been cycles in the use of silver.
Going forward to the present time, one very important area for silver is solar panels or photovoltaics. That area has grown in the last 10 years to about 100 million ounces a year, which is about 10% of the market and will continue to grow. I mentioned President Biden's infrastructure plan. Part of that plan is building out, and I quote, “millions of solar panels.” The solar area is really gaining traction, not just in the West. It's big in Europe and we're hearing about Latin America and Asia increasing their solar power. That has to do with a very simple fact. As the population grows and as countries industrialize, our air gets dirtier and we fret about China’s air being bad. Governments around the world would like to clean up their air for their citizens. Solar and wind power are great alternatives to coal-based power. That's the first area I would say we would continue to see growth in.
The second area is automobiles. The car industry is evolving rapidly as well. We're moving towards hybrid cars, greener energy, fewer emissions and ultimately electrification of all vehicles. That has a twofold effect. First of all, hybrid and electric vehicles use more silver. Silver is already widely used in cars. Your car will have a couple of ounces of silver in it and you don't see it. It's used in very small quantities. It's used in mirrors and anything electric, air conditioning units, switches, etc. As you transition to hybrid cars and electric cars, what they call silver loadings are going up, so we are expecting to see growth in that area as well.
The second part to the car industry is as you go electric, you need to install more infrastructure and charging stations. Many of the charging stations are solar-powered and that goes back to my solar theme. We will see more silver being used for these stations. The third area we talked about is 5G networks. Silver is being used in the towers and the infrastructure that are part of building out the 5G infrastructure.
I wrote an article about this a couple of months ago (Silver's Clean Energy Future).Between those three areas that we've done research into, we've counted over 150 million incremental ounces that will be needed per year in physical silver within the next 10 years. Just to put that in perspective, 100 million ounces is 10% of the silver market. While that does not sound like much to some people, I would say it’s pretty difficult to find 100 million ounces more a year in terms of silver production.
Most of the market is mine production. The way I would think of one hundred million ounces a year is ten rather large silver mines that we need to find. I meet with mining companies all the time. I look at silver exploration and what's happening in the market. While I am encouraged that we are starting to put money into exploration, I just don't see many 10 million ounce mines coming online within the next 5-10 years. For me, those exciting areas of growth in the market actually translate to a potentially real shortage of silver looking out 5-10 years.
You don't have to be a savvy investor to understand supply versus demand. It sounds like the demand is going to continue to at least remain stable, if not grow, and supply may have some challenges down the road. It’s an exciting time to be thinking about silver from an investment standpoint. What are some of the ways that an investor can allocate to the silver market, whether it's on the physical side or the equity side? What are your thoughts on that?
There's definitely multiple ways of investing in silver and silver equities, more so in physical silver. You can look at silver coins, which command a high premium to spot prices. There are ETFs and other financial products that would be a more efficient way because they generally have less of a premium to spot, so you wouldn't overpay as much to spot. Everyone's situation is different and I would encourage everyone to consult with their investment advisor, or you can reach out directly to Sprott.
And what about the mines themselves? From an equity standpoint, what words of caution would you advise investors on when investing in mining companies in general? Are there pure mining silver plays that investors should be thinking about as well?
Investing in mining companies in general is a tricky business. You really have to consider several factors, starting with the management team, infrastructure, location, political risk and importantly, geology, which is very tricky sometimes. Again, you can consult with your investment advisor, and they can advise you. Sprott is actually quite unique in that we offer silver-specific products. Other companies, as far as I know, do not have such products.
I think you've really done a great job of covering all ends of silver from demand to supply, to how it's used, how to invest in it and so forth. Are there any final thoughts you'd like to leave with listeners? How should someone think about investing in silver, whether it's as a pure play, or a diversification play?
Silver offers that dual nature. On the one hand, I'm a long-term believer in silver because notwithstanding the short-term fluctuations and sentiment swings, we know that governments all over the world will continue spending money and we're seeing debt at record levels as a percent of GDP. We're seeing debt levels we haven't seen since the World War II. It's telling us that governments are continuing to print money, and silver is a hard asset. That view of silver- its value as a monetary hard asset - is a very prospective for us.
Then there are the interesting developments on the industrial side. Much of the silver that goes into industry, we don't even get back. As I mentioned, scrap supply is actually a small proportion of the market. Because silver is used in small quantities we never see it again. It's a treadmill. We need to continue producing more and more. Whether you believe in strong economic growth or whether you believe in fiat currency debasement, I think silver will benefit from both of those aspects. And that's what makes me so excited about silver.
Maria, thank you for taking the time today to join us on Sprott Gold Talk Radio. We appreciate your insights into the silver market. For our listeners who want to learn more about silver, Sprott and Maria, please visit us at Sprott.com. We also encourage you to reach out to our senior investment consultants. We have consultants that cover the east coast, central region and the west coast. You can reach out to them at 888.622.1813. Until next time, happy investing and we'll talk to you soon.
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