Silver has had a good run in late summer.
After trading below $20 an ounce in late June and July, the price rallied 20% to top $24 an ounce. It was at $23 about 10 days ago.
On Friday, the iShares Silver ETF (SLV) rose nearly 2%, and the metal ended the weak at about $21.7 an ounce.
Over the past six weeks, SLV has outpaced SPDR Gold Shares (GLD) by a wide margin. It moved up 13% since Aug. 1 vs. about a 1% gain for GLD.
What does McGlone see currently as a mid- to longer-term outlook for the precious metal, and how does he define its role in client portfolios.
The market conditions were ripe for a rally in late summer, the analyst noted in a recent interview, and given silver’s historical volatility and investors’ search for value, the rapid price increase wasn’t unexpected.
Even after the rally, however, silver remains well below its 200-day moving average of about $26 an ounce.
Looking ahead to the intermediate and longer term, McGlone (right) sees several factors that will support the price and move it higher.
First, silver is a hybrid metal. It trades as both an industrial metal and a precious metal.
On the industrial side, he points to statistics like the Purchasing Managers Index, or PMI. The PMI came in at 55.7 for August, and the overall trend shows continued, albeit modest, growth in the U.S. economy.
Additionally, the use of silver in photovoltaic production for solar panels, especially in China, is projected to possibly double within two years, which could “increase to 10% of global annual production for silver,” says McGlone.
Silver sales continue at a high level, supporting the precious metal demand.
U.S. Mint’s sales of American Eagle silver coins through August surpassed the total for all of 2012, according to a Bloomberg report. The Mint sold about 33.75 million ounces of the silver coins year to date, compared with 33.74 million 2012.
A Portfolio Perspective
Most advisors and clients aren’t trading silver or other metals short term, at least not for a significant part of their portfolios.
Allocations to metals typically are used as inflation or disaster hedges or to increase exposure to industrial output levels.
McGlone cites gold and silver as being in the first category with palladium as an example of the latter. That metal’s usage is about 70–80% industrial, and it has a high correlation to global GDP historically.
What’s an appropriate approach to metals in the portfolio?
McGlone suggests creating a “basket” that holds multiple metals (or metals ETFs, in this example) and shifting the allocation among the basket’s holdings as appropriate.
“For any portfolio manager who has very little inflation protection and very high exposure to equities without any other diversification, the precious metals are very attractive,” he says. “You might want to focus more on the gold and silver side.”
For those who have a defensive-type portfolio already and want exposure to the industrial growth and the shift of increasing global per capita GDP, notably in Asia, the analyst suggests shifting “a bit more focus towards platinum and palladium or the white metals, the silver, platinum and palladium.”
There is always the risk that a metals allocation will underperform and drag down the portfolio’s results, but the lack of correlation to equities and the metals’ price sensitivity is desirable.
For example, the equity markets have had strong returns in 2013 -- but consider what happened in mid-August, he cautions.
“We had that one week a couple weeks ago, I think it was August 12 or so, S&P dropped around 2% and silver increased almost 12%,” he says.
“We just did a little research on it a while ago,” explains McGlone. “If you have inflation that increases at, let’s say, near 4% in CPI, historically the beta of gold to CPI is around 5, meaning you’ll get five times that return.”