Silver: A Trade Idea For Coverd

A Trade Idea for Coverd:

Silver

The first silver I ever purchased was in 2008. I was living in Sweden at the time, with all my savings denominated in Australian dollars. I was an exchange student in Stockholm, and I was living month to month, making sure my Scandinavian expenses never exceeded my small Australian allowance. Then the financial crisis hit, and the Australian dollar crashed. I had very luckily exchanged 6 months of expenses into Swedish Krone just 2 weeks before the FX move. Had I not, I would have had to pack my bags for home and cut my time abroad short. It made me ask a simple but profound question.

“What is money?”

How did all my hard earned savings nearly disappear? If someone loses, another wins. How does that exchange occur?

This was when silver (and gold) entered the conversation for me. I never looked at fiat currencies the same way again. Why save your money in a unit of account that the governments

promise to debase?

Back to the trade idea. Silver has a few very unique properties that piques and holds onto my interest.

Silver has historically been money on countless occasions across countless locations. Did you know, the Chinese word for bank 银⾏ literally means “silver business/trader”. Another teaser, what does the French word for money have in common with Lionel Messi’s home country? Ever wonder where the phrase “cold, hard cash” came from? Silver is a precious metal, we have just somehow forgotten about it.

Electrical conductivity. Silver is known to be a unique metal for industrial purposes due to how conductive it is. It is used in all forms of electronics and electrical goods. It is currently being consumed heavily by the solar industry due to this property, with year on year consumption growing exponentially.
Silver is usually used in small amounts for it’s applications in electronics (or in solar). Imagine if there was $0.30 worth of silver in a mobile phone worth $500-$1,000. The price of silver could move 10x without the manufacturer worrying about margins getting impaired. Silver is somewhat demand inelastic with respect to price.
Due to its electrical conductivity, it will feature prominently in the race to electrify our grids. Would Tesla or BYD cut down on performance, substituting with copper instead of silver if there was no strong price incentive to do so?

Silver is mostly mined as a by-product. Why is this important? Silver is mined mostly as a by product in Lead-Zinc or Copper mining. Due to this, the decisions these mines make to ramp up or slow down depends on minerals such as Lead, Zinc or Copper. An increase in silver’s price might not mean we see a linear ramp up in silver production. Silver is somewhat supply inelastic with respect to price!
There is currently a supply demand imbalance. The World Silver Survey announced a 265.3m oz market imbalance for 2024. This is now the third year in a row where this is the case. For context, mining production was estimated to be 830 million ounces, with recycling approximated at 179 million ounces.

In a nutshell, Silver is a critical mineral used in a myriad of applications. The more the world modernises (cell phones, solar panels, smart grids) the more

silver will be needed. Supply will have to meet demand, or prices will rise to damped demand. As mentioned before, silver is relatively inelastic when it

comes to signals, so prices will have to move really strongly to make an impact. Similar to other minerals we follow, silver in the ground will act as a call option on the price of silver, and the value of mining companies with good deposits should appreciate in price alongside the price of silver.

So Why Silver for Coverd?

CHECK LIVE PRICE DATA

For my own personal investment strategy, I look to hold undervalued assets that have negligible chances of going to zero, which will pay when they revert to their historical mean in value. These sectors are usually cyclical, or for certain reasons, sentimentally unloved. Due to this, their volatility is usually soul wrenching. To go through 50% drawdowns only to finish the year even is par for the course with such investments. The silver lining in this is that they offer very attractive options premia as a result. Enter the technique of selling Covered Calls.

My mental checklist for deploying the covered call strategy:

Underlying has near 0 chance of bankruptcy or going to zero.
The underlying is a good candidate for a long-term buy-and-hold
There is sufficient volatility to generate healthy options premia
I am bullish on the sector or security
Options volumes and open interest are ‘high enough’.

Silver is for the moment interesting in that it is not only extremely cyclical (look at a long term chart), it is also pretty unknown and undiscovered. Silver is still only 60% of its 1980 high. Name one item you know that is 40% cheaper than it was in 1980. Even the Nikkei can’t claim that throne :)

As we go through prolonged monetary and energy crises in the near future, I believe both these aspects will soon turn.

The simple questions are:

Is the world going to need more electronic and electrical goods?
Will solar panel production continue to grow?
Could prolonged high inflation and reckless monetary policies motivate precious metals purchases?

I personally believe that the chances are tilted towards positive answers for the questions above. By using the covered call strategy, I am able to generate healthy premiums to help with my carrying costs, and also weather/mitigate the volatility until price rises to stifle demand or increase supply. Look at the table above for ROI estimates generated for options expiring roughly one month out. I use the coverd app to help me ascertain and judge relative risk and reward quickly, allowing me to compare options pricing between numerous securities (Stocks or ETFs) and expiry dates.

I will leave this brief intro here for now. Looking forward to hearing from you, and perhaps learning about an interesting idea or two from you at our discord or via email.

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Key sources of additional information:

https://www.silverinstitute.org/

https://www.silverbullion.com.sg/why-buy-precious-metals

Recent Media of Interest:

https://twitter.com/SilverBullionPL/status/1781304940537024749 Twitter thread detailing the recent 2024 silver institute report.
https://www.visualcapitalist.com/sp/silver-through-the-ages-the-uses-ofsilver-over-time/ Uses of silver over time, presented as usual excellently by the people at visual capitalist
https://www.visualcapitalist.com/silver-series-new-energy-in-solar-and-ev/ Another visual capitalist masterclass detailing silver use in Solar and EV industries
https://www.pv-magazine.com/2024/04/19/pv-industry-demand-for-silvercould-rise-by-20-this-year/ PV Industry demand for Silver could rise by 20% this year

Disclaimer: I am only sharing my thought process, and my own investment strategy. I do not in any way want to influence your own financial decisions. Please speak with a certified financial advisor and/or do a ton of your own due diligence before risking any of your own capital.