Energy’s Silver Lining: A Precious Metal Powering the Future

Within artificial intelligence computer chips, we see significant uses of silver because it is highly conductible. So all of these areas are high growth areas, and they all point to the overall changing landscape. Welcome to Shifting Energy, I'm Thalia Hayden with ETF Guide. We are so glad to have you with us today. We're diving into Sprout's new ETF, the Sprat silver Miners and physical silver ETF, ticker SLVR.

Joining us now is Steve Schall with Sprat Asset Management. Hi Steve, welcome back, great to see you as always. Great to be back, thanks for having me again. So Steve, the Sprat silver Miners and physical silver ETF, ticker SLVR, draws on Sprout's long legacy in precious metals, but silver is widely used in many applications and is critical to the energy sector. What role would you say silver plays in the shifting energy landscape?

That's a great question. The shifting energy sector really boils down to the need for more electricity, and that electricity coming from diversified energy sources. So when we look at the growth in electricity demand, it really comes from three main areas. The first being, if we look at developing countries as they start to urbanize and industrialize, their surging electricity demand to keep up with that growth. In more developed countries, we see things like technological advances as it relates to artificial intelligence, data centers, electrification, and a growing use of supply chain reshoring, something that's become a priority in recent years.

Finally, overarching everything is the global transition to cleaner energy. So this is the move on a global scale to really look at our energy sources and look for more renewable sources. So all told, if we look at the energy demand and what's expected to happen out through 2050, estimates by the International Energy Agency say that we could expect about 170% increase in electricity demand relative to 2023. So the way that silver ties into that, it has a number of uses as it relates not only to electricity but also clean energy.

The first would be in solar panels and the photovoltaic solar cells that are used. It's also used in control rods and nuclear energy, so it makes up about 80% of the material in the control rods. And then within artificial intelligence computer chips, we see significant uses of silver because it is highly conductible. So all of these areas are high growth areas, and they all point to the overall changing landscape.

All right, got it. Well, there's another play on silver, of course. I'm talking about the monetary aspect and its relationship to gold. So can you tell us more about where silver fits into monetary considerations?

I think that's what most people are familiar with, is silver as a precious metal, right there next to gold and platinum to a certain extent. It still does keep a lot of those traits, even though we're starting to see its industrial uses increase. Typically, when we look at what precious metals do well, it is typically environments where you have things like currency debasement, inflation, geopolitical risks, lowering falling interest rates. Sometimes you see it through periods of economic recovery.

Those are a lot of the things that we see going on in a global perspective now. As it relates to falling interest rates, if you look at the Federal Reserve and its dual mandate to keep stable inflation and maximum employment, it's reasonable to expect that we could see some further cuts in the interest rates going forward, which could bode well for precious metals, including silver. If we were to look back at the last six precious metals bull markets going back to the inflation area of the 1970s, you would see that silver tended to do very well relative to gold. On average, it outperforms by about two to one.

So for pretty significant outperformance that we see from silver from that perspective. Of those six precious medals bull marks that we've seen, actually five have occurred this century, with the most recent being in the one that we're believe to be in one now, starting in 2023. That's largely as it relates to the geopolitical concerns and decreasing interest rates that we see on a global scale. When you look at the price of silver and how it's reacted through these bull markets, if we were to go back at the turn of the century, you would see silver somewhere around $5 per ounce.

It's increased at an annualized rate of about 7% to where we're currently up around $31 per ounce as of the time of recording this. So what we see in the precious metal space, I mentioned about the two times outperformance relative to gold, but in the current bull market that we see with precious metals, silver's actually underperforming gold on a relative basis. So while it's still up 1.4 times to gold, it's underperforming relative to its historical pattern. Another widely followed aspect of precious metals investing is the gold to silver ratio.

This is basically a way for investors to know how many times gold is trading to silver. Typically, if we go back 35 years, we see that ratio running at about 70, where we sit today, it's closer to 90. So when you look at that and you look at the relative performance of silver versus gold in this current bull market, it leads us to believe that there is some additional room for silver to kind of catch up and get closer to this historical averages. So those higher silver prices are something that we foresee going not only over this bull cycle, but going many, many years into the future as we start to unpack the industrial uses of silver.

Okay, now Steve, can you tell us how SLVR is different from other funds that invest in silver miners, and would you say all silver mining companies are the same? I think the short answer to your second question is no, not all silver mining companies are the same, and we'll talk through that. One of the things that we do at Sprad is we take great pride in our product development effort. We have a deep expertise as it relates to metals and mining that goes back several decades with a specific focus on precious metals and critical materials.

So when we look to bring a new ETF to market, we have a couple things that we look for. The first would be we want to find something that aligns with our expertise, so that's the first stop of what we look for. Second, we also want to look for those trends that we think are long-term in nature, so not looking for the hot investment cycle or the hot theme at this moment. Finally, we do a scan of the investment landscape and we look at based on the current available offerings out there, is there a way that we think that we can improve investor outcomes?

So it's through that lens that we worked with NASDAQ to co-develop the index that is tracked by SLVR, the Sprat physical, the sprot silver Miners and physical silver ETF. So our ETF launched here in January, but we're really excited about it. I'd say one common theme that we have amongst our ETF strategies is that we take a pure play approach, and that provides investors with a focused exposure. So what that looks like in the case of SLVR is we our focus is to provide exposure to pure play companies, to companies that have at least 50% of their revenue or assets tied to things like the mining, the production, exploration, development of silver.

We also have a physical component, a physical silver component, which makes up about 17 1/2% of the index at every semiannual index rebalance. We do have for liquidity purposes, we do have a screen where we have a 25 to 50% revenue screen though, that only makes up about 15% of the index, and we keep that at a minimal level just to provide additional liquidity. So to understand why pure play is so important, there's a few things that we have to realize about the silver market. It is different than what we might see with copper or gold markets.

The first is that 72% of the silver that's mined is actually mined as a byproduct of other metals. So if you were to look at lead and zinc for example, miners that are mining those two metal Metals account for about 31% of overall silver production. The second aspect to look at the silver market is when you look at the 10 largest silver producers, zero of them are predominantly silver miners, meaning they principally mine other metals. So it's with that lens that we look at our silver offering and what that means for the market.

If we look at comparable ETF strategy, so other silver mining ETF strategies, we find that they tend to have a much lower bar than our pure play approach. Often times they may screen for companies that have an allocation to silver or they generate some revenue for mining of silver. Our pure play approach is much higher, and what that results in is a product that has about twice the exposure to silver relative to other silver mining ETF strategies. To take that a little bit further, if we look at the overlap, so how similar are the portfolios from one to the next and their strategies, the SLVR only has a an overlap that's somewhere in the the range of you know 25 to about 30% or so relative to other ETF strategies.

Meaning that SLVR is about 75% different than other offerings out there. So that that's a significant way that demonstrates how the pure play approach plays out as it relates to the underlying constituents. I think another another piece is if we're looking at the exposure of companies that have less than 25% of their revenue tied to mining Sil, in SLVR we don't include those companies in our portfolios. If you look at other silver mining ETF strategies, you can see that number be as high as 50% and on the low side 28%. So very significant exposure to companies that aren't necessarily very much involved in mining silver as it relates to the overall revenue of the firm.

So I guess basically to summarize, you know, SLVR is providing the greatest allocation to silver while decreasing and providing the least amount of unintended commodity exposure. So with that, it's our view when we look at investors that are trying to get exposure to that silver market, we think SLVR may be well positioned to help them reach those investment objectives.

Now Steve, we've heard silver inventories are declining. Can you tell us more about how the industrial uses of silver are impacting the supply and demand equation? Absolutely. So, you know, silver as a precious metal is one of the oldest forms of currency, but we are seeing an increase in it used from an industrial standpoint. As of 2023, which is when the most recent data is available, about 55% of all silver was used for industrial purposes.

It's also second the second most widely used commodity behind only oil with about 10,000 uses for silver. We see that in things like the medical field where there's antimicrobial and antibiotic and antibacterial uses for silver. It is the most conductive element on Earth, so we do see it used a lot in electronics and we talked about its uses and things like AI computer chips and solar panels and nuclear energy. But overall, we've seen a pretty steady growth in industrial uses for silver.

Industrial uses grew by about 11% 2023. Once last year's data becomes available, we expect to see a growth rate of somewhere in the neighborhood of 8 to 9%. So pretty steady growth that we've seen there. When we start looking at solar panels, that's really the aspect of the industrial demand that we see really pushing growth forward. So in 2015, if you were to look back at how much silver demand actually came from solar panels is about 6%, where we sit today, that's actually increased to about 16% of overall industrial demand.

There's two main uses reasons for that. One is just the growth in the acceptance and the usage of solar panels, and the second is the technology is at a point now where it's starting to evolve. We have the topcom topc solar panels that are solar cells that are starting to be rolled out. We expect them to become the predominant solar cell moving forward, and we expect the 2024 data to show that last year was actually a Tipping Point in that the reason why that is important is because this new solar cell technology uses 50% more silver than what we've seen with past Technologies.

So not only are we using more solar, the solar that we are using requires more silver because of Technology. And then if we look at the supply of silver, so that's the demand side. If we take a look at Supply, we see supplies remain relatively stagnant. It's dropped actually about 3% since 2015, so we don't have a lot of new silver being mined coming onto the market.

Because most of that silver, that 72% being mined as a byproduct that we mentioned earlier, that's really what holds back Supply. If you're a miner and you're predominantly mining things like copper or lead or zinc, you're not going to to change your operations based on the price of silver because that's not a primary driver of of the economics of each individual mine. So what we're seeing is that those pure play miners, the ones that are focused on predominantly mining silver, are the ones that may be well positioned to benefit from not only increasing their supply but taking advantage of higher prices.

We see Sprat continuing to prepare investors and advisers for the critical materials Mega Trend by offering a full Suite of critical materials ETFs. Why should investors consider adding exposure to Silver Miners and to their critical materials exposure? So it really comes down to the the solar usage that we see from silver and how important it is to the solar industry. If you're familiar with our lineup, we do have a large suite of critical materials ETF, and our Flagship fund, the the Sprat critical materials ETF, which we launched about two years ago, ticker setm, actually has about an 8 to 9% allocation to Silver.

So this is something that is very much needed in the generation of cleaner energy, and many view it as a critical material. So that's why we we look at it also not only for precious metals uses, but also for the critical materials purposes. We find that with funds like SLVR that investors really appreciate the opportunity to get targeted exposure to just a single commodity. So when we're talking about what makes SLVR different from other silver mining ETF strategies, that pure play nature really sticks out.

To kind of walk through a little bit how what that can mean to a portfolio, if you look at pure play silver miners, again that 50% revenue test, their average sustaining cost to mine silver is about $17.18 an ounce. So with silver prices currently trading around $31 an ounce, there's a fair degree of profitability within each one of those within that that group of pure play miners. Given the demand dynamics that we see playing out, and when we start looking at things like currency debasement and inflation inflation and geopolitical risks, those are all things that are lining up.

We believe to a market that may be pointing toward a period of longer term growth in the silver market. Then from an investor standpoint, looking at what that might mean for a portfolio, so you have the growth aspect that is based on supply and demand characteristics and the profitability of the underlying miners, but on the other side, you can also have some diversification benefits that is afforded through the precious metal side. If you look at silver miners as it relates to the S&P 500 for example, you'll see that the correlation between those two is about 0.47, meaning it's a moderate degree of correlation.

If you look at the overall broader bond market, you see that correlation actually dips down below 0.4, which starts getting a little lower, and there there is actually an inverse correlation to the US dollar. So it does provide some diversification benefits from the monetary aspect with the growth aspects that we see from the critical material space.

Well, you've certainly given us a lot to think about. Thank you so much for your timely Insight Steve. It's great to be here, thanks. That'll do it for today's episode of Shifting energy. If you enjoyed the show, please let us know in the comments section below by hitting that like button and to learn more about the investment strategies and ETFs we've discussed on today's program, be sure to visit Sprout etf.com. I'm Thalia Hayden with ETF F guide, thanks for watching and we'll see you next time.