2024-01-16 03:56:38 ET
Summary
- Global X Silver Miners ETF is showing signs of life, and a period of outperformance is likely following years of relative weakness versus silver.
- SIL has outperformed silver prices in recent months and has room to catch up further if the historical pattern repeats.
- Expensive valuations and overly optimistic Fed rate cut expectations pose risks.
After several years of underperformance related to silver prices, the Global X Silver Miners ETF ( SIL ) is showing some signs of life and a period of outperformance looks likely from current depressed levels. The SIL has a history of moving sharply higher during periods of silver strength, and while such episodes have been rare, conditions now look ripe for another one as monetary conditions move looser.
The SIL ETF
The SIL aims to track the Solactive Global Silver Miners Total Return Index, an index of global companies involved in the silver mining industry, including those engaged in silver mining and/or closely related activities such as exploration and refining. The fund is heavily weighted toward one stock in particular, Wheaton Precious Metals Corporation ( WPM ), which makes up 23% of the index, while Pan American Silver ( PAAS ) makes up a further 14%. The SIL charges an expense fee of 0.65% and offers a dividend yield of 0.6%.
Long-Term Weakness Does Not Preclude A 100% Rally
Since its inception in 2010, the SIL has lost around one-third of its value, and relative to spot silver prices it has lost almost one-half. This weakness is in part the result of bubble-like valuations in precious metals shares in 2010, as well as rising costs in the industry, and I expect this record of underperformance to continue over the long term. However, over the past 14-year bear market there have been two strong rallies of over 100% and we may be on the cusp of another.
SIL has outperformed silver prices over the past few months, with the ratio breaking above trendline resistance, and there is significant room for the ETF to catch up further should silver remain around current levels.
Longer term, the ratio of the Solactive Global Silver Miners over silver looks primed for a reversal, after having also bounced off of long-term support going back to the 2008 low. If the historical pattern holds true, we should see the ratio double over the coming months as was the case in 2009 and 2016.
Ratio Of Solactive Global Silver Miners Over Spot Silver (Bloomberg)
As I noted recently in this article, the fundamental outlook for silver prices has strengthened amid the rally above $2,000 in gold and signs of recovery in industrial metals prices. Macro conditions are highly favourable for silver as the rate cycle has turned lower at the same time as the global macroeconomic cycle appears to be turning higher, at least according to the rally in equity markets. This should help to support both investment and industrial demand for the metal. As the chart below shows, silver has been in a consolidation pattern for over three years now and a bullish breakout seems like the path of least resistance.
Valuations And Inverted Yield Curve Are The Two Main Drawbacks
Despite the SIL trading near all-time lows relative to silver, its valuations are far from cheap. The trailing PE ratio is 29x while the forward PE ratio is up at 63x, meaning that valuations should pose headwinds to long-term returns. Another risk comes from overly crowded expectations of Fed rate cuts, with 165bps of easing expected in 2024 alone. Any resurgence of inflation or pick up in growth could see the Fed disappoint investors by holding rates for longer than expected, which would undermine the case for silver and the SIL.
For further details see:
SIL: Signs Of Life In Silver Miners