Silver To Shine In 2023: Don’t Miss Aberdeen Standard Silver ETF

Investment Thesis

Silver, as represented by the Aberdeen Standard Physical Silver Shares ETF (NYSEARCA:SIVR), experienced only a modest gain in 2022 due to a tough macro environment. In 2023, the macro environment for SIVR is anticipated to improve, as the Federal Reserve will likely be less hawkish following a moderation in inflation dynamics. This should lead to a fall in the dollar and US real interest rates, resulting in a rise in the monetary demand for silver. As silver’s positioning is too light judging by historical standards, we think that there is plenty of dry powder to deploy on the long side of the silver market, pushing prices higher. With a silver market in deficit, we are confident that SIVR could be a great investment opportunity in 2023.

About SIVR

SIVR is an ETF product using a physically backed methodology. This means that SIVR holds physical silver bars in HSBC vaults in London.

In addition to providing investors with a tangible asset, the physically-backed methodology prevents investors from getting punished by the contango structure of the Comex silver forward curve (forward>spot), contrary to a futures contract-based methodology.

For long-term investors, SIVR seems better than its competitor SLV, principally because its expense ratio is lower (0.30% for SIVR vs. 0.50% for SLV), which is key to make profit over the long term.

However, SIVR has a tendency to trade at a premium, which is above its net asset value. As of January 13, SIVR was 2.57% above its Net Asset Value. This makes this ETF more suitable for long-term investors, who are not inclined to trade actively the ETF but rather buy and hold for the long term.

SIVR is a great solution for investors looking for a physically-backed, transparent, and safe option for investing in silver.

Slight Positive Start to 2023

The Aberdeen Standard Physical Silver Shares ETF has enjoyed a slight positive start to the year, amid a broad-based bounce across the precious metals complex.

This follows a mild gain of 2.6% in 2022. While SIVR outperformed GLDM (gold) and PALL (palladium), it underperformed PLTM (platinum).

A More Favorable Macro Backdrop

Even though SIVR made gains in 2022, the macro backdrop was a big headwind for silver and the broader precious metals space as a result of the aggressive tightening of monetary policy in the United States to combat inflation. This led to a significant appreciation in US real interest rates and the dollar.

In 2023, the macro environment should become more positive for SIVR. Because inflation in the United States is moderating and economic growth is slowing, the Federal Reserve is likely to be less hawkish than in 2022, especially considering the substantial dose of tightening that the US central bank has delivered over the past year. If we are right, the dollar and US real interest rates may come under downward pressure in the coming months, resulting in an increase in monetary demand for silver via ETF buying and speculative demand and, thus, a price appreciation of SIVR.

A market in deficit

Looking at silver’s fundamentals, the silver market was in deficit last year and is most likely to remain so in the coming years. The Silver Institute estimates a deficit of 194 million ounces in 2022, according to its latest estimations announced in November 2022. This contrasts with a shortfall of 48 million ounces in 2021 and this should be the greatest deficit in decades.

Total supply (mine production and recycling) is predicted to amount to 1.017 billion ounces in 2022, up 2% from 2021.

Demand is predicted to total 1.210 billion ounces in 2022, up 16% from a year earlier. The largest contributor to demand growth is jewelry (+53 million ounces, or +29%) in ounces, and silverware (+30 million ounces, or +70%) in %. Demand from the industrial sector is predicted to climb by 28 million ounces, or 5%, in 2022. Despite the slump in the global economy, industrial demand for silver has shown to be resilient due to solid structural development in individual sectors such as solar panels (more capacity installed) and autos (more electronics needed). Silver consumption from vehicles amounts to 5% of the global demand, and that from solar panels is roughly 10%. The Silver Institute predicts deficits to remain in the next few years, albeit not as high as in 2022.

A Light Positioning

Despite silver’s solid fundamentals, speculative positioning in the CME market remains too light, judging by historical standards.

As of January 13, 2023, the net long speculative position in CME silver amounted to 3,613 metric tons, which is below its year-ago level (2,713 metric tons) and far below its all-time high of 15,328 metric tons in 2018. Last year, speculative positioning turned net short temporarily, which was the result of the deterioration of the macro environment for precious metals.

As the macro backdrop turns more supportive for silver and silver’s fundamentals are healthy, we expect money managers to boost their net long exposure to the metal in the coming months, which will be supportive of SIVR.

Conclusion

We expect a more favorable macroeconomic backdrop for silver in 2023 after rough macroeconomic conditions for the precious metals complex in 2022. As inflation in the United States appears to be moderating, we think that the Fed will be less hawkish than in 2022, resulting in a decline in the dollar and US real interest rates, thereby boosting the monetary demand for silver. This, along with strong fundamentals in the silver market, could make SIVR a great investment opportunity for investors seeking exposure to silver prices.

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