In today’s issue:

  • How bottlenecks are boosting investment returns in surprising places
  • From power grids to solar panels, there are opportunities in a crisis
  • The reverse bottleneck that could be the UK’s next big shock

Last week I wrote about the grid-bottleneck that is threatening to slow down the transition to zero-carbon electricity system. From listed microcaps to global superpowers, everyone is converging on this theme.

Bottlenecks are common in these sweeping, global, structural shifts like the energy transition. They cause incredible rushes into single themes or even single assets.

Like with AI, where there’s a shortage of the best chips. Only Nvidia can produce them – and every company in the world wants to buy them (including Mr Musk over at xAI). That gives Nvidia huge power, and with it comes great profitability and an eye-watering share price. (There are opportunities elsewhere to be had in the AI space for the ordinary investor… if you know where to look.)

But things can also work in the other direction, when there’s an extreme over supply of something – like when oil prices went negative during the Covid inventory glut.

Either way, it’s these cycles of over and under supply which cause prices to rise and fall. Today, in a rare instance, I think I’ve found an asset that could profit from both a bottleneck in one area of the markets, and a glut in another.

No competition

One story which caught my eye recently was an awkward sporting moment in Russia. It’s reverted to its Cold War stance of hosting its own pantomime games, as it’s excluded from the Olympics. It’s calling them the BRICS Games this time round, trying to build that alliance with Brazil, China, India and South Africa.

A moment of tragic comedy unfolded when in one event there was no silver medal presented. In fact, the synchronised swimmer who won gold stood uncomfortably, alone on the podium, having been the only competitor in the televised event.

It signals the extent of the geopolitical dislocation we live in at the moment.

That’s one reason why precious metals have soared, gold especially. Wars and geopolitics are one of the drivers of the safe haven asset. (My colleague John had an interesting discussion with UK precious metals expert Adrian Ash on this very subject.)

But its forgotten friend, silver, has been slow to catch on. Indeed, while gold has notably broken out to all-time highs this year, silver remains stubbornly 40% below the highs it set in 2010.

Source: Koyfin

And that’s not adjusting for inflation, which when factored in, makes silver actually 57% below its 2010 highs. That’s despite a recent little surge.

The meme stock #tothemoon effort to send its price higher during the Gamestop craze has fallen flat.

A two-decade supply shortage

I think that could all be about to change. I’m looking at this from an energy transition standpoint, seeing silver more as a commodity than a currency. While its price historically moves in a close correlation with gold, the magnitude of those moves can be dimmed or exaggerated by its industrial supply/demand balance.

Silver is widely highlighted as an essential industrial metal, especially in solar panels and cathode powders for batteries. It’s crucial to solar panels because of its high electrical conductivity, thermal efficiency and reflectiveness.

These are two fast growing industries, but supply of silver is coming under huge pressure due to mine closures across the world. The supply of silver was lower in 2023 than in 2010. Given the importance of supply dynamics in determining price, and given that even gold has managed to add a few percent to annual production most years, that’s a surprising fact.

Silver mine closures have taken place across South and Central America in recent years, such as Barrick in Chile, Pan American in Argentina, Kinross in Chile, and the second largest silver mine in the world, Newmont’s in Mexico. This amounted in recent years to what one bullion company called the greatest silver supply deficit in two decades.

And these shortages could last for years. The CEO of global commodities trader Trafigura recently said, “There is a serious problem at the moment in terms of metal availability. There is a view that we can just flick a switch and produce more. You can’t. This requires long term planning.”

This concerns me deeply given silver’s importance as an industrial metal in the energy transition, just as the key trends are really taking off. In fact, contrary to popular belief over half of silver is used for industrial applications, not jewellery or as a store of value. That’s why I analyse it more as a commodity than a currency.

“Industrial demand is soaring, driven by photovoltaic and other electrification end uses, while supply is flat to declining,” said another CEO, this time Mitchell Krebs of Coeur Mining.

Excessive supply cutbacks could lead to soaring prices, making solar power and other technologies more expensive, slowing their deployment. That’s my worry.

Threat, or an opportunity?

Through this commodity-focused lens, silver becomes an investible commodity as well as a risk factor for the transition.

But I’m not the only one who sees a stealth bull market growing in silver…

Because while I mainly approach it from the energy transition and see clear reasons for soaring demand and limited supply, a classic bottleneck situation…

Nick Hubble, ever the monetarist, is writing about a very different problem. It’s the big lie of the UK election, he thinks, and it’s all to do with a secret policy to flood the markets with a glut of one particular thing.

That over-supply will also be good for precious metals he thinks.

But it could be terrible for your wealth.

That’s right, while there is an opportunity to potentially profit, it might be even more important to protect your wealth from Labour’s shocking first policy…

Nick will be revealing more this week, so keep an eye out.

Until next time,

James Allen
Contributing Editor, Fortune & Freedom