Nicholas Brooks on the Outlook for Silver

Hard Assets Investor submits:

Last week, European ETF titan ETF Securities started trading its first U.S. fund, the bullion- backed ETFS Silver Trust (NYSE Arca: SIVR). But with five products already on the books, does the American silver market have room for another ETF?

That’s why we decided to sit down and talk silver fundamentals with Nicholas Brooks, head of research and investment strategy for ETF Securities. With over 15 years’ experience as a global economist and strategist, Brooks has worked with Henderson Global Investors, Deutsche Bank and Citibank. Recently, HAI associate editor Lara Crigger chatted with Brooks about the rise in physical silver investment, the connection between the gold and silver markets and whether the higher prices can be sustained.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): We’ve really seen an uptick in silver demand recently, especially physical investment. What’s driving that?

Nicholas Brooks, head of research and investment strategy, ETF Securities (Brooks): To some degree, what’s going on with silver is related to what’s going on with gold. Investors view silver as a safe haven asset in the same way they do gold, and as a hedge against inflation and possible paper currency weakness. So silver is benefiting from the still-high uncertainty over the outlook for the global financial system and over what government intentions are, given the aggressive quantitative easing and the rapid run-up in government debt levels.

Crigger: We’re starting to see physical investment in silver on the rise, while physical investment in gold is dropping. What’s the reason for this? What advantage does silver have over gold?

Brooks: Silver is a very interesting commodity, because it’s a hybrid between an industrial metal and a precious metal. About 53% of the end demand for silver is from the industrial sector, compared to around 12% for gold. So silver demand is more sensitive to swings in the business cycle than gold is.

In this environment, silver is in a very fortunate position. There’s still lingering uncertainty about structural risks to the global economy, but at the same time, lead indicators of global industrial activity have picked up strongly since late February, early March. We’ve seen a very strong run in many of the more cyclically oriented commodities, especially industrial metals like copper. So I think silver’s been benefitting from that, while at the same time, lingering concerns about the outlook for global financial stability, potential future inflation, rising government debt levels and the long-term outlook for the U.S. dollar are causing investors to increase their weightings in silver.

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