The Federal Reserve Board is approaching a point where it has stopped rate hikes in the past, a positive real fed-funds rate. February CPI (Consumer Price Index) grew 5% YOY down from the 9.1% peak in June 2022, while the Fed funds rate sits at a range of 4.75-5%. Ripple effects from the fastest rate hike cycle in over 40 years are now being seen through rising credit card debt, slowing housing demand and the banking crisis that has tightened credit. The Case Shiller Housing Index, tracks monthly change in the value of single family homes in the US, which we would argue is a more accurate reading of the housing market than the CPI calculation, has seen seven straight months of contraction.
For precious metals investors, all eyes are on the dollar. The speed of monetary policy tightening, especially relative to global central banks, strengthened the dollar to a 20-year high September 2022 but has pulled back roughly 10% since. Recent dollar weakness has created a tailwind for precious metals.
As we get close to what looks like the terminal value for the Fed funds rate, the table is being set for precious metals, and more specifically silver, to trade based on the positive fundamentals. If history tells us anything, a pause or reversal in interest rate policy can be a catalyst for silver like we saw in 2001 and 2008. The precious metals asset class has been dormant during the bull market following the global Financial Crisis as investors favored risk assets. However, 2022 saw global central banks buying the largest sum of gold on record. Gold demand as a safe haven asset has brought the gold/silver ratio to roughly 80 (long term average of ~65). As gold is bought up with recessionary fears looming, the gold silver ratio could potentially move even higher (gold outperforming silver) which only makes silver more attractive on a relative basis. Silver is a more thinly traded asset than gold (a fraction of the gold market) and therefore when precious metals rally, silver typically outperforms gold.
Inflationary pressures increased the input costs for miners to extract the metal over the last year. However, commodity prices have begun moving higher and input costs are moderating. This stability should provide the mining industry with more confidence as they continue to protect and more importantly maximize margins. The tide is shifting, and it is only a matter of time before the market begins to shed light on the positive supply/demand fundamentals the silver industry has shown since 2021. Strong demand coming from solar PV panels, electric vehicles, and physical coins, etc. has continued to outpace supply over the last two years. Picking winners in the mining industry is a tough endeavor which is why we believe owning a basket of silver miners is a prudent way to diversify risk in a portfolio.
Portfolio Update: Pan American Silver and Agnico Eagle have completed the acquisition of Yamana Gold assets at the end of Q1!
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Fund’s prospectus, which may be obtained by calling 1-844-ETF-MGRS (1-800-889-1438), or by visiting www.etfmg.com/SILJ. Read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Narrowly focused investments typically exhibit higher volatility. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for investments in emerging markets. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual issuer volatility than a diversified fund. Funds that are less diversified across countries or geographic regions are generally riskier than more geographically diversified funds and risks associated with such countries or geographic regions may negatively affect a Fund. Investments in small-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. The ETFMG Prime Junior Silver Miners ETF is subject to risks associated with the worldwide price of silver and the costs of extraction and production. Worldwide silver prices may fluctuate substantially over short periods of time, so the Fund’s share price may be more volatile. Several foreign countries have begun a process of privatizing certain entities and industries. Privatized entities may lose money or be renationalized. The Fund invests in some economies that are heavily dependent upon trading with key partners. Any reduction in this trading may cause an adverse impact on the economy in which the Fund invests. The Fund’s return may not match or achieve a high degree of correlation with the return of the Prime Junior Silver Miners & Explorers Index. To the extent the Fund utilizes a sampling approach, it may experience tracking error to a greater extent than if the Fund had sought to replicate the Prime Junior Silver Miners & Explorers Index. IOPV or indicative optimized portfolio value is an estimated intraday fair value of one share of an ETF determined by the last trade price of the fund’s underlying securities.
ETF Managers Group LLC is the investment adviser to the Fund.
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