(Kitco News) - The silver market continues to struggle in the face of persistent inflation pressures and higher bond yields. However, one market strategist says the precious metal remains an important monetary asset and diversification tool.
In an interview with Kitco News, Nate Miller, Vice President of Product Development at Amplify ETFs, said that although silver's price action has been disappointing since its highs at the start of the year, prices are still well above where they were a year ago.
Spot silver last traded at $58.89 an ounce, down more than 1% on the day. However, last October, prices were just starting to test resistance at $50 an ounce.
Despite the difficult headwinds, Miller said he sees silver carving out a new base and believes its long-term uptrend remains firmly in place, as he is skeptical that the Federal Reserve will be able to bring inflation fully under control.
Although rising interest rate expectations have weighed heavily on precious metals, Miller said that investors should not overlook the longer-term risks posed by persistent inflation and the declining purchasing power of fiat currencies.
Currently, higher bond yields are increasing the opportunity cost of holding non-yielding assets such as gold and silver. At the same time, expectations that the Federal Reserve will succeed in containing inflation have helped support the U.S. dollar, creating another significant headwind for commodity prices.
However, Miller suggested that this environment could change if inflation proves more persistent than markets anticipate.
He noted that an eventual easing of inflation pressures, particularly if energy prices retreat, could create room for a weaker U.S. dollar and stronger commodity prices, including gold and silver. (Kitco Global Index shows how much of today's gold move is the dollar versus the gold market itself.)
Along with its monetary characteristics, Miller said that silver continues to benefit from its important role as an industrial metal.
He highlighted demand from the solar photovoltaic sector, which remains a major consumer of the precious metal. This industrial component provides silver with an additional source of demand that distinguishes it from gold.
However, Miller added that the precious metals investment market has evolved significantly in recent years, and silver can play an important diversification role even as its opportunity costs rise in an environment of higher bond yields.
Although silver has traditionally been viewed as both a monetary and industrial metal, Miller noted that investment products offering an income component are changing how investors approach the market.
In particular, he said that covered-call strategies could provide an attractive opportunity for investors looking to maintain exposure to silver while generating income during periods of elevated volatility.
Covered-call strategies generate income by selling call options against an underlying investment. Investors collect premiums from the options, creating a potential income stream that can help offset periods of stagnant or declining prices. However, these strategies can also limit potential gains during sharp rallies and do not eliminate downside risk.
Miller said that while investors can continue to hold silver for long-term capital appreciation, he currently sees greater appeal in strategies that combine exposure to the precious metal with an income component.
"Over the next couple of months, for me, the covered-call version stands out," he said.
The strategy could become particularly relevant as silver continues to trade in a relatively broad range, with investors struggling to determine the next major direction for monetary policy.
Miller said that he expects volatility to remain elevated through the final months of the year as markets continue to adjust their expectations for Federal Reserve interest rates.
"I think the fourth quarter is going to be more of this. It's going to be more of this volatility," he said.
While increased volatility can create risks for options-based investment products, it can also support higher option premiums, potentially increasing the income available through covered-call strategies.
However, investors must balance that income potential against the possibility of missing out on significant upside if silver prices rally sharply.
For Miller, the appeal of these products is that investors no longer have to rely exclusively on rising silver prices to generate a return.
With inflation risks remaining elevated, monetary policy uncertainty continuing to drive volatility and industrial demand providing underlying support, Miller sees reasons for investors to maintain exposure to silver even if prices struggle to regain their bullish momentum in the near term.
And with new investment strategies offering the potential to generate income, silver's traditional disadvantage as a non-yielding asset may be becoming less of an obstacle for some investors.
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