Date: 06/01/2021
Author: Mr. X
The U.S. Mint raised some eyebrows last week when it announced it had to postpone fulfilling some orders. “The global silver shortage has driven demand for many of our bullion and numismatic products to record heights,” it explained on a Facebook post. As this is written, silver has once again topped $28 and is fighting to consolidate above that key level.
With the cryptocurrency market highly uncertain, silver is once again moving to the fore as a classic choice to protect assets against inflation. While silver has fallen from heights it reached earlier this year, it now looks to regain that position and then some. Silver has a key advantage over other hedges – it is an industrial metal as well as a store of value. As a critical component of many solar panels and a way to guard against inflation, silver is perfectly positioned. It’s not surprising that iShares Silver Trust [SLV], First Majestic Silver [AG], and ProShares Ultra Silver [AGQ], among others, all increased over the last month.
Silver may just be beginning its run as the Biden Administration’s infrastructure bill moves through Congress. Thus far, President Biden has been trying to work with Republicans, pushing for a bipartisan solution. However, Senate Majority Leader Chuck Schumer, displaying some impatience at the process, said the Democrats will work on a bill with or without Republicans next month. The Republican counteroffer to President Biden’s proposal is about one trillion dollars; Democrats acting unilaterally would spend far more.
The Wall Street Journal reported on May 31 that even the Federal Reserve is beginning to doubt the wisdom of continuous stimulus payments. For now long-run consumer inflation expectations are roughly in line with what the Federal Reserve expects. However, that can change quickly. I agree with former Treasury Secretary Larry Summers. I expect that government officials may soon learn that the supposed control they have over inflation is a mirage.
Of course, only time can tell. Yet if inflation is the unknown factor in the economy, supply chain disruption is the problem that everyone knows about. Semiconductor shortages have produced production cutbacks in everything from cars to video games. Raw materials are in short supply.
Among these materials is the humble metal copper. A strike in Chile has endangered global supply and Bank of America commodity strategist Michael Widmer recently forecast “copper market deficits, and further inventory declines, this year and next.” A Goldman Sachs researcher went so far as to predict a shortage that could last as long as a decade.
As discussed previously here, ways to play this include United States Copper Index Fund [CPER], Global X Copper Miners ETF [COPX], Southern Copper [SCCO] and Freeport-McMoRan [FCX]. However, the major gains here (as in other raw materials) may have already been made. If companies see the shortage coming, they may take measures to avoid reliance on copper.
Thus, Aptiv [APTV] may provide a better opportunity. It’s up over 100% in the last year, but is down over the last three months. This could be the time to strike. Massive government aid is probably on the way for electric vehicles. This will drive both increased production and consumer demand. Aptiv promises to reduce electric vehicles’ reliance on copper. It promises its “Smart Vehicle ArchitectureTM ” (SVATM) maintains or even increases computing power while “the excess baggage of multiple micro-controllers, power supplies, housings, and copper is discarded.”
Finally, there’s another raw material that’s been overlooked until recently. This is cobalt, highly important in cell phones and electric vehicles. Like “blood diamonds,” obtaining the material is often distasteful. Much of the world’s supply is located in the Democratic Republic of the Congo. Often, children have worked in the mines. The world’s attention has been drawn to these atrocities, but that won’t stop the hunger for cobalt. Numerous companies have been sued on the grounds they are responsible for the deaths of workers.
The Democratic Republic of the Congo recently banned exports of copper and cobalt concentrate, but it is now allowing companies with “waivers” to operate. Electric car companies and others who require cobalt may move to purchase mines directly rather than relying on intermediaries. Cobalt is up more than 35% since the beginning of the year, though it is declining in recent weeks. This could be another chance to buy on the dip.
Wheaton Precious Metals [WPM] recently closed an agreement to obtain cobalt via Voisey’s Bay Mine in Canada. WPM’s considerable holdings in increasingly valuable precious metals and its flow of cobalt from a North American source makes it look attractive even before we think about a disruption in cobalt production.
Silver, copper, and cobalt are not world changing technologies or cutting edge brands. However, they and other materials are part of the foundation which makes futuristic products possible. As the dollar struggles, spending soars, and Big Tech faces possible regulation, look to the raw materials that will be at the beginning of any production chain for modern products. Skip the middleman and go straight to the source.
