Can Silver Mining ETFs Continue To Shine? [iShares Silver Trust (ETF), Global X Silver Miners]

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March 3, 2014 10:33pm NYSE:SIL NYSE:SILJ

silver minerTaking many investors by surprise, natural resource investing has dominated the headlines this year thanks to the global growth worries following the initiation of the taper.

Both gold and silver have followed this trend, and while both types of bullion have performed well, the surge was more intense in the mining ETF space, as the latter often trades as a leveraged play on the underlying metal.

Notably, between gold and silver mining ETFs, the second has seen more gains this year and its Zacks Industry Rank is also more favorable. Silver mining ETFs, which shed about 50% in 2013, gained 25% in contrast to 22.48% gain seen in gold mining ETFs. To add to this, junior silver ETFs crushed the commodity producers’ ETF space surging about 42% in the time frame.

Inside the Recent Surge

Vagueness in the pace of the Fed’s QE taper and the resultant volatility in the dollar, some downbeat U.S. economic data and geopolitical tension over Ukraine and Russia have sapped the demand for risky assets and bolstered the need to invest in safe havens. This flight to safety has sharpened the safe haven status of gold and silver and resulted in such enormous gains.

In fact, the silver mining industry, at least in terms of its Zacks Industry Rank, has really been delivering a decent show of late with most companies carrying a Zacks Rank #3 (Hold). The segment is now ranked in the top 37% overall, which is a solid move in the right direction in a very short time frame. In fact, the space has moved northward by 66 spots in just a week indicating analysts’ slowly building hopes over this investing territory, at least from an earnings estimate perspective.

Also, many investors have started to view silver as a leveraged play of gold. As per ETF securities, since 2000, silver prices increased 1.4 times the increase in gold prices on average. In 2013, silver price declined about 1.3 times more than that of the gold price.

Global X Silver Miners ETF (NYSEARCA:SIL), iShares MSCI Global Silver Miners Fund (NYSEARCA:SLVP) and FactorShares PureFunds ISE Junior Silver ETF (NYSEARCA:SILJ) soared 24.73%, 26.07% and 43.0% respectively, this year. Investors should note that silver mining ETFs managed to get places in top-10 YTD performers lists (read2 ETFs Riding High on Q4 Earnings Results). 

Can Silver Continue Shining Same?

We expect the road ahead for silver mining ETFs to be bumpy, at least for the short term. The metal is hugely used in industrial activity with about 50% of the metal’s total demand coming from industrial applications. With China, the biggest industrial fabricator after the U.S., recording lackluster manufacturing output of a seven-month low, silver mining ETFs might struggle in the coming days.

Sooner or later, the Fed will wind down its massive QE stimulus program which in turn should push up the dollar against a basket of various currencies marring the prospect for silver investing. Also, these metals are often considered as a hedge against rising inflation. But, at present, inflation rate in many developed nations in the world remain stubbornly low which poses a threat to silver investing with a mid-term view.

Silver Lining of Silver Mining ETFs

Though we all know taper is an inevitable fate in the U.S., much of the taper concerns have been priced in by now and these mining ETFs probably saw their worst days last year. Thus, we don’t expect anything more terrible for silver mining products in taper-stricken 2014, though the journey might be pretty rough The Comprehensive Guide to Silver ETF Investing).

Also, a faster taper means a faster U.S. economic growth which in turn hints at a pickup in industrial activity in the U.S. This should boost the demand for silver. China is also striving hard to boost its growth profile. There has also been solid demand for silver from the key Indian market, arranging a solid scenario for silver from an international perspective.

Mixed Technical View

The biggest silver mining ETF, SIL, is currently hovering a near the middle of its 52-week range. Its short-term moving average is higher than the long-term average thus indicating bullishness in the space. The relative strength index for SIL is presently 58.47, indicating that the fund is creeping into overbought territory.

Thus, we believe, investors that have a strong stomach for risks can consider buying silver mining products. These products presently carry a mixed-bad outlook and might offer a good entry point now on the buy side thanks to its low valuation. Even if this year proves to be a hard one for silver mining ETFs with each measured taper announcement, the year ahead should shine for investors.

This article is brought to you courtesy of Eric Dutram.

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