The world is going through an unprecedented economic period, the likes we have not seen since the Great Depression. It is only a matter of time before gold and silver prices are much higher. However, the road to higher precious metals prices will be a bumpy one. Before we arrive at our destination, don’t be surprised if we have to go through another dollar shortage drawdown, similar to what happened in March 2020.
If it isn’t a dollar shortage, then at the least, high levels of volatility will probably hit again at some point. I briefly wrote about the challenge this presents to gold and silver mining companies when I wrote about the risk of owning GDXJ and as well as GDX in an attempt to diversify your gold holdings.
To briefly explain, fiat currency is the problem that makes owning gold and silver in your portfolio the solution. However, owning gold and silver isn’t only a solution for individuals. You see, it’s also the solution for governments. Therefore, when squeezed between a rock and a hard place, governments around the world will be tempted to seize hard assets, either partially via taxes and forex controls, or entirely via nationalization.
It is helpful to understand the dollar shortage problem and how the Federal Reserve attempts to combat the problem. Here’s an excerpt from a previous article that I wrote:
“Today, the world over is experiencing a dollar shortage problem once again. This dollar shortage isn’t unlike 2007 and 2008, as you might recall. To combat this problem in December 2007, the Federal Reserve established what it calls ‘swap lines’ with particular nation’s central banks. Swap lines provided a lifeline to these nations, which were struggling with a dollar shortage during the recession. The Federal Reserve again did this in 2010 when strains in the system began to reappear. And once again, the Federal Reserve is implementing these dollar swap lines today. Here’s how they work per the FOMC website.
In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first.”
Where Do the Swap Lines Exist Today?
The FOMC has initiated dollar swap lines with the following nation’s central banks as of March 2020.
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank
Reserve Bank of Australia
Reserve Bank of New Zealand
Banco Central do Brasil
Bank of Korea
Banco de Mexico
Monetary Authority of Singapore
Sveriges Riksbank (Sweden)
Danmarks Nationalbank (Denmark)
Norges Bank (Norway)
- Central Bank of Indonesia
Will Swap Lines Work?
Swap lines may work in providing currency relief to those countries that have them, but it doesn’t necessarily stop any one government from going rogue (desperate times may cause desperate measures) if they choose to. Others of us don’t believe this is an issue to be concerned about at all. I don’t believe opining on whether it is a risk that you believe will come to fruition or not is all that helpful. After all, none of us know for sure what the future may hold. No matter what side of the fence you are on, this is here to help you understand the issue and take the appropriate action for your portfolio as you see fit.
Global X Silver Miners ETF (SIL): Top 10 Holdings and Their Jurisdictions
Each item in the list is labeled with a number indicating its relative ranking in the ETF, followed by the company name and the percentage amount that that holding makes up in the ETF itself.
#1 – Wheaton Precious Metals (WPM) – 22.41%
Source: Wheaton Precious Metals FY2019 Annual Report
#2 – Polymetal (OTCPK:AUCOY) – 12.84%
Source: Polymetal International FY2019 Annual Report
Source: Pan American Silver FY2019 Annual Report
#4 – Hecla Mining (HL) – 5.92%
Source: Hecla Mining FY2019 Annual Report
#5 – Fresnillo PLC (OTCPK:FNLPF) – 4.93%
Source: Fresnillo FY2019 Annual Report
Source: First Majestic Silver FY2019 Annual Report
#7 – SSR Mining (SSRM) – 4.73%
Source: SSR Mining FY2019 Annual Report
#8 – Buenaventura (BVN) – 4.33%
Source: Buenaventura FY2019 Annual Report
#9 – Coeur Mining (CDE) – 3.48%
Source: Coeur Mining FY2019 Annual Report
#10 – Industrias Penoles (OTCPK:IPOAF) – 3.38%
Source: Industrias Penoles FY2019 Annual Report
SIL Top 10 Jurisdictions – 100%
The Global X Silver Miners ETF is a quick and easy way to gain exposure to a variety of silver mining stocks. This is probably the primary advantage of owning the ETF rather than individual companies themselves. However, in the coming months, this may turn out to be a disadvantage if things again become volatile.
To help you navigate this, here are some takeaways from the charts above:
- When owning SIL, 9 percent of your holdings are in Russia with another 4 percent in Kazakhstan via the company Polymetal. This may not be a bad thing, but it is something to be aware of.
- Twenty-two percent (at least) of your holdings are in Mexico. Knowing this, if you continue to own SIL, it may be wise to find companies that are more invested in other countries. Mexico is a swap-line nation, but it’s still good to not have all your eggs in one basket. There are examples of companies where the Mexican government is making it difficult to do business there.
- Australia is better known for its gold, but if you want to diversify, it’s good to know that the top 10 holdings in SIL aren’t invested in Australia. Maybe look for a company in Australia.
- Canada is lower on the list of SIL jurisdictions at only 5.7 percent. Maybe look at companies that invest in Canada.
- Peru, although not a swap-line nation, has generally been a friendly place for companies to do business. Almost 13 percent of the top 10 SIL holdings are in Peru.
This discussion isn’t to necessarily dissuade you from owning the ETF. For example, I am currently invested in a company like B2Gold (NYSEMKT:BTG), which has some wild jurisdictions. However, I am aware of the risk and believe that it is undervalued to compensate for that risk. Because I own B2Gold, I try to be more selective with my other holdings.
Whether you agree with the risk, understanding jurisdiction risk is good information to have. This may all be a minor issue that has become overblown, but then again, Papa New Guinea dropped a bomb on Barrick Gold (GOLD) in April that should keep us all on alert.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author of this article is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author of this article expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.