The past couple days of US dollar strength has corresponded with a sharp drop in the prices of many precious and industrial metals, among other commodities. Oil has rebounded a bit from its more recent downward trend. It feels to me like a buying opportunity.
Dollar weakness is not done yet; I don’t see the fundamental causes of dollar weakness subsiding for many years. Commodity demand should also continue to grow for many years. Together, these point to higher dollar denominated prices for commodities. Precious and industrial metals prices, in my view, are particularly well suited for growth. As the economic production of the globe grows, so too does the percentage of metals used in production. Silver acts both as a precious metal and an industrial metal. I anticipate it will see increasing demand from investors trying to avoid US dollar weakness, as well as manufacturers.
One of the great industrial benefits of silver is its exceptional heat conductivity. In an age of growing demand for electronics, heat dissipation is a core concern. Silver is a major ingredient in thermal conductive paste that is used to connect heat sinks. In some cases, recycling can recover traces of silver for reuse, but the demand is high and growing.
Silver is supplied in large part as a byproduct of mining for other metals. The mining of new silver has not grown much in the last 75 years. As the US Gov’t has depleted its silver reserves, that supply has satisfied the industrial and investor demand to such a degree that the price has not trended upward beyond an inflationary-type growth rate. Low, slow-growth supply combined with higher, faster growth demand points to a good long term opportunity.
As always, a lot of things could go wrong with this story. The world could become enamoured once again by US investments, and drive up the value of the dollar. The world could experience a production slowdown, reducing the demand for commodities. Synthetic replacements could reduce the demand for silver in manufacturing. Precious metals could fall in favor with investors who shift toward more economically productive investments. All of these could hurt silver prices. But I like the odds.