The silver slingshot: reaping the potential benefits of a strategic allocation to silver
Ned Naylor-Leyland examines the potential benefits behind allocating to silver and explains why he believes silver is poised to break out and what this could mean for investors.
The golden ratio
The price of gold measured in USD has surged, breaking through resistance at $2,150 in April and demonstrating significant upward momentum since¹. Our strategy’s current positioning² consists of approximately 18% bullion (through bullion trusts), 36% silver miners, and 46% gold miners. This represents one of our most bullish stances (as reflected through silver allocation) since inception in 2016. We believe that silver is poised to follow gold and see substantial price increase.
The Jupiter Gold & Silver strategy’s performance is significantly influenced by the gold-to-silver ratio. This ratio is a way to understand how many ounces of silver you would need to purchase one ounce of gold. When the gold to silver ratio falls, silver outperforms gold, and we tend to outperform peers³. Conversely, our strategy lags when the ratio trends higher and the sector struggles overall (higher ratio). We believe that silver’s growing monetary and industrial demand has yet to be fully recognised by the market and have therefore built up a tactical allocation to it.
The silver advantage
Silver is buffering below the critical price level of $32.50, a threshold that could trigger a powerful upward surge. We anticipate silver prices reaching $50 to $70 when the technical ceiling is breached. This “silver slingshot” is the catalyst we have been anticipating.
Silver poised to breakout?
Historically, silver has often outperformed gold by a significant margin during periods of market volatility and increased demand for monetary metals. As illustrated in the chart below, the current market conditions closely resemble the setup of 2010-2011, suggesting a similar potential for silver’s price appreciation.
Silver price ($)
Source: Bloomberg, 27.09.2024
The recent gold price increase has been primarily driven by paper futures contracts, rather than physical demand or central bank purchases. This is a crucial distinction, as it highlights the nature of the gold market, how the USD Gold price is not moved by physical trends but by paper market activity.
Our current focus on silver (through bullion trusts) has positioned us to potentially capitalise on the growing demand for physical metal and the underlying fundamentals driving the silver market. Despite the challenges of holding silver, our strategy’s portfolio allocation has been carefully constructed to capture this opportunity.
Silver benefits from dual demand drivers. Besides serving as a safe-haven asset during economic instability, silver is important to growing industries such as clean energy and electronics. This strong industrial demand establishes a dynamic price floor for silver, bolstering its long-term appeal to us.
Global silver supply and demand market imbalance
Source: Bloomberg, 27.09.2024
The future of silver
There remains a deep structural deficit for silver as its use in industrial applications grows. The investment world is aware of the explosive demand growth in solar panels which rely on silver for reflectivity and conductivity but there are further demand drivers emerging. Battery technologies, such as Samsung’s groundbreaking solid-state EV battery, are likely to further increase the demand for silver. The incorporation of multiple kilograms of silver into these batteries, if rolled out globally, would further fuel the metal’s price appreciation.
As investors become increasingly aware of these as new demand drivers, we anticipate a surge in demand for silver, driving the price to new heights. We believe that we are well positioned to capitalise on this growing trend and deliver meaningful long-term returns.
We believe that our strategy of investing in physical bullion and silver miners, along with a foundational holding in gold equities, provides a distinct value proposition not found in our competitors’ offerings. This approach relies heavily on the key factor of the gold-to-silver ratio. As this ratio shifts to favour silver, we anticipate being well-placed to achieve strong risk-adjusted returns. Recent signs of changes in the gold-to-silver ratio support this outlook. Our team diligently monitors this ratio and actively adjusts our holdings to seize this opportunity for superior performance.
¹Past performance is not a guide to future performance
²As of 30 September 2024
³EAA Fund Sector Equity Precious Metals peer group
Risk information
Investment risk – there is no guarantee that the strategy will achieve its objective. A capital loss of some or all of the amount invested may occur.
Sector concentration risk – the strategy’s investments are concentrated in natural resource companies, and may be subject to a greater degree of risk and volatility than a more diversified strategy. Silver tends to outperform gold in a rising gold price environment and it tends to underperform gold when sentiment moves against the sector. The strategy invests in other collective investment schemes, which themselves invest in assets such as bonds, company shares, cash and currencies, it will be subject to the collective risks of these other funds. This may include emerging markets risk and smaller companies risk.
Company shares (i.e. equities) risk – the value of Company shares and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions.
Concentration risk (number of investments) – the strategy may at times hold a smaller number of investments, and therefore a fall in the value of a single investment may have a greater impact on the portfolio’s value than if it held a larger number of investments.
Smaller companies risk – smaller companies are subject to greater risk and reward potential. Investments may be volatile or difficult to buy or sell.
Liquidity risk – some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the strategy’s ability to meet redemption requests upon demand.
Derivative risk – the strategy may use derivatives to generate returns as well as to reduce costs and/or the overall risk. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.
Jupiter Gold & Silver Fund
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
Refers to the overall delta of a collection of derivatives based on the delta of each individual derivative and their respective “weight” or size in the collection as a whole.
The average duration of a fund, with each bond within the portfolio being weighted according to its size.
The proportion of the total portfolio represented by an investment in a security or sector.
The date on which a company expects to wind up.
Marketing communication for professional investors only. This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Company examples are for illustrative purposes only and are not recommendations to buy or sell. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.