If you ask the average investor out there what metal they’d recommend to diversify a portfolio, they’ll usually reply, “Gold”. In 2020, gold reached historic highs as investors flocked to it as a hedge against market uncertainty. Yet, gold’s highs were some time ago. As investors have awakened to the possibility of higher interest rates, gold has become less and less attractive. Higher interest rates are bad for gold because gold doesn’t yield any interest. Putting your money in gold in this environment is a recipe for sub-par performance. There’s a smarter way to play the metals game. According to research from JPMorgan, we are in the first innings of a commodity supercycle. At a time when commodities are experience severe supply constraints, there is no reason why investors should restrict themselves to gold. I suggest investing in the rare metals bull market. The rare metals bull market has been spurred on by the recovery of oil to pre-pandemic highs. As global mining and emerging markets have rebounded, rare metals have received a boost and their outlook is especially bright. In this article, we will discuss how to take advantage of the rare metals bull market.
One metal I like right now is silver. This is because silver has extensive industrial uses, unlike gold. Warren Buffett is famously averse to gold, but he has played the silver game. When he bought silver in 1997, it was at a time of high stock market valuations. He analyzed the silver market and discovered that there was a shortage of silver relative to demand. At the time, nobody really mined silver on purpose. It was essentially a by-product of mining other metals. This led to a huge imbalance in the silver market and at some point, there would be a reckoning. Buffett purchased 130 million ounces of silver and went on to make a $97 million profit. An interesting fact about silver is that it has outperformed gold in five of the last six gold bull markets!
At present, we are again in a period where stock market valuations are extraordinarily high. There is evidence that silver has entered a bull market. In a bull market, prices typically remain higher than their 150-200 day moving average. That gives you an indication of the dynamics at play. As the global economy recovers, demand for silver will rise in response to the reopening of industry. Remember, silver has extensive industrial applications.
Silver’s outperformance is different to that of gold. Silver was up 70% in 2020 at a time when everyone was talking up gold. Since gold’s 2020 highs, gold has been in a funk, with its price declining and experiencing a lot of volatility. When an asset experiences this much volatility, it’s usually because investors’ conviction about that asset is shaky. Every bit of news either spooks them or sends them over the moon.
One thing that makes silver so interesting is that because gold is usually touted as a safe haven against economic uncertainty, gold is unlikely to perform well as the economy recovers. Silver, however, will do well as the demand for its industrial applications rises. It’s not surprising then that gold has only risen 4% in the last twelve months, against 70% for silver. It’s for this reason that influential thinkers like the Rare Metal Blog have promoted investment in physical silver.