War plus inflation at four decade highs should make for a late 1970s bull market in precious metals, but it hasn’t happened yet. While silver sometimes corresponds closely with gold as a safe haven precious metal and a monetary metal, it other times more closely correlates with copper due to its industrial aspects. Either way, the long term trends for silver are positive.
There will be a point at which the trends in the market and silver market affect global silver supply and demand pull institutional interest back into the space. In the past, silver spent long periods of time languorous, before undertaking sharp moves to the upside. The decline, however, can be just as violent as the upward move which preceded it. Heading into 2023, many are more optimistic about silver than gold.
For instance, delegates at the LBMA/LPPM Precious Metals Conference 2022 forecasted that over the next twelve months the gold price would rise a modest ten percent—the most bearish forecast for gold by conference attendees since 2016. The delegates had a different outlook for silver, predicting it would rise a staggering’ 52% to $28.30 on average. There are several reasons why market participants would believe silver will do well in 2023.
Retail Bar And Coin Demand
Retail bar and coin investment demand is strong across many jurisdictions. After heavy liquidations in 2020 and 2021, we are now seeing steadying demand more in line with the 2013-2015 period. The proof is in the premiums. Retail premiums on American Silver Eagles are as high as $17 per ounce. “The end-consumer seems quite happy paying basically 100% markup for a silver Eagle,” he said.
These are sustained high premiums reportedly due to a shortage of silver planchets at the U.S. Mint. Other products have also experienced steep prices. It’s not that there is a silver shortage; rather, there is a shortage of the right product.
Year-to-date, the US Mint has produced 15.9 million ounces of American Silver Eagles. The Mint might produce up to 17.5-18 million ounces worth of silver, which is two-thirds the rate of last year. This could persist well into 2023. Since supply from the US Mint has not responded to demand, Sovereign mint products have been much more available in the United States this year.
Long Term Demand In Silver
Current global demand for silver is approximately 1.2 billion ounces. Metals Focus estimates a 16% increase in forecasted for global demand this year, and just a 2% rise in global supply, underscoring a stark contrast between supply and demand (not including ETF activity). London and CME have acted as “suppliers of last resort” to the silver market.
Industrial demand composes half of global silver demand, which was up approximately 5% on the year. Global installations of photovoltaics—that is, solar panel installations—have hit successive new highs. Many countries today focus on energy security, which is a boon to photovoltaics. The net zero push has increased a greater uptake of solar photovoltaics.
Although photovoltaics and solar panel use has increased dramatically over the last 10 years, 80% is reportedly sourced via thrifting. Moreover, you also need 80% less silver to produce the same quantity of electricity as you once did, because industrialists have managed to reduce the amount of silver in photovoltaic pastes or reconfigure the lines of silver paste on the panel to save on costs.
Industrialists will continue to thrift for silver. But, the more difficult to decarbonize sectors—steel industry, petrochemicals industry, sea transportation—will also move to hydrogen, engendering demand for wind and solar to generate hydrogen from electrolysis, which will require silver. Therefore, silver has a bright future in the longer term in order to generate green hydrogen and meet net zero commitments.
Auto Industry
The automobile industry has recovered a bit over the past year, though still well below previous years. Additionally, cars remain expensive due to a shortage of certain parts, causing “demand destruction,” when high prices for certain goods squash demand for that good. As the auto industry moves from the traditional internal combustion engine to hybrid and electric vehicles, silver usage by the industry will climb.
Short Term Silver Market Drivers
Industry comprises only about one-sixth of the overall silver demand at the moment. In the face of long-term structural trends towards greater silver use, certain factors could weigh on the price of silver: the recessionary environment, higher interest rates, and industrial users thrifting for the metal and even substituting where possible.
Inflation Reduction Act
The so-called “Inflation Reduction Act” is designed to lead to a great deal of investment into photovoltaics, and also electrification, which benefits silver. The Biden Administration estimates the Act will result in $370 billion worth of investments into energy security and climate change programs. The Act incentivizes installations of solar energy and provides key benefits for U.S.-based companies manufacturing solar products, such as cells and modules.
India, India, India
Indian silver demand is expected to increase by approximately 80% this year—a new record. After two years where silver demand was dampened by the effects of Covid lockdowns, traders have drawn down warehouse inventories from London to Hong Kong. More than a third of total silver consumption in India is jewelry demand. Nearly one-quarter goes to the industrial sector. The rest goes to silverware and other applications.
2020 saw historically low silver demand out of India. In 2022, local silver purchases approximated 8,000 tons, up from approximately 4,500 tons last year. Silver holdings in London, where India sources much of its silver, fell to 27,101 tons at the end of September 2022, the lowest since records were first kept in 2016, according to the LBMA.
In the second half of this year, as rupee prices weakened considerably, and silver imports lagged demand, premiums increased, as seen in the American Silver Eagle market. This allowed something rare to happen in the Indian market.
Historically, silver generally arrived in India by sea freight. In 2022, however, India saw an unprecedented 60% come in by air. That’s been possible from a cost standpoint, because of the premiums on silver.
With insatiable demand, businesses don’t want to wait months for their sea container to arrive. Businesses are reportedly paying 25 cents an ounce to have silver flown into India from London storage, which takes two days for deliveries to arrive, as opposed to paying five cents an ounce via sea, but waiting for weeks.
Around 300 million ounces worth of silver bullion will be imported into India, coming off a relatively weak 2020 and 2021 during which the industry saw heightened levels of de-stocking. Investors were either selling or metal was kept off the market by, for example, silverware or jewelry manufacturers, heavily depressing imports.
China
In the short term, potential of continued regional lockdowns in China are a threat to next year’s photovoltaic and chemical applications silver demand. For example, the use of silver in ethylene oxide manufacturing, which goes into all sorts of other downstream petrochemical products. China says it has put an end to “zero-covid,” but just this past November Beijing, home to approximately 22 million residents, was locked down.
China is one of the main concerns for any 2023 economic forecast. The country is also experiencing genuine political risk, with a lot of disquiet in the media about potentially coordinated protests unlike we’ve seen in 30 years. We won’t know the effect China has on the global economy until we see if they’ve truly put an end to zero-covid.
“China’s regional lockdowns are a threat to some of the demand for next year and possibly beyond in terms of PV and conventional chemical application for silver,” Butler explained. “There is an increased risk of 2023 being a recessionary year for Europe. That will impact some industrial sectors as well.”
European Recession
This year has been very difficult for Europe. A combination of high interest rates, high inflation, and the increased cost of living make recession next year likely. That would impact industrial sectors. The silver market could take a hit if Europe descends into recession in 2023, as expected.
“The economic situation has deteriorated markedly and we are heading into two quarters of contraction,” said EU economy commissioner Paolo Gentiloni at a December press conference. The European Commission said in a statement: “The EU is among the most exposed advanced economies (to high prices), due to its geographical proximity to the war and heavy reliance on gas imports from Russia. The energy crisis is eroding households’ purchasing power and weighing on production.”
Professional Money Is Bearish On Silver
While the supply and demand fundamentals are absolutely vital in determining the way the market will move, professional or hot money continues to obfuscate the market. The futures market drives the silver price, and physical demand responds to that. When it comes to the silver market, the tail wags the dog. Nonetheless, the market is absorbing all of the metal coming from ETPs, different vaults, depositors and so forth.
Managed money gives us one of the best insights into investor and speculative sentiment. The gross short on COMEX, which in July hit 58,600 tonnes, represents the largest short on the COMEX since July 2019. From early September to mid-October 2022, the silver price increased 5 percent, driven in large part by short covering in the financial sector.
ETF liquidations have been an abundant supply source to the market, which has alleviated the persistent deficits the market has experienced. Approximately 125 million ounces of ETF liquidations took place in the first ten months of this year—-a considerable chunk of the deficit. Counting the supply from ETFs, the deficit is perhaps not as severe as it otherwise might be. Still, it remains a major factor.
If there is a structural deficit between new supply and scrap versus fabricated demand, the ETPs could remain as a source of supply to the market, which could hang over the silver price, even as the immediate deficit continues. It’s never entirely clear how much coming out of ETPs end up in LBMA or CME vaults. It appears today silver is going straight to refiners.
Professional money is bearish on silver largely due to the changing macro-environment; in particular, the aggressive interest rate hikes in the U.S., which have increased the cost of carry. Four successive interest rate hikes of 75 basis points—3%, on the headline interest rates—since the summer and a dollar at a 20 year high have dampened silver price action.
“This increased cost of carry for pretty much everything. The U.S. dollar increased to 20-year highs, and inflation continued to rise this year. All of that created a perfect storm, and managed money has been moving away from non-yielding assets, which have been a drag on their portfolios in this high-interest rate environment,” explained Mitsubishi Corporation head of business development Jonathan Butler.
Managed money has moved away from non-yielding assets, which can drag down portfolios in higher interest rate environments. Real yields (inflation adjusted yields) have moved into positive territory for the first time since the pandemic, leading to a fundamental shift away from gold and platinum group metals.
With recession now a given, and the possibility that interest rates could peak in early 2023 or mid-2023, inflation starts to come down on a year-over-year basis. Managed money investors remain cautious versus retail investors who are being squeezed by inflation, the cost of living increases, political uncertainty, and more, which all drive silver demand, particularly in coins and bars.
Gold-Silver Ratio
The gold-silver ratio, which as much as anything trades on chart-related technical factors, has been a topic of study and conversation for a long time. It’s trading today at 78 ounces of silver to one ounce of gold. During the pandemic meltdown, it traded at 120 silver ounces to one gold ounce, indicative of gold’s safehaven role. In early March 2020, as global markets were in disarray, gold dropped by one of the smallest percentages and recovered among the most rapidly, falling by about 12% and recovering within three weeks. Silver, on the other hand, lost 39%, falling to $9, an eleven year low.
In short, gold and silver outperformed the S&P 500, which took all year to recover and lots of stimulus. At the moment, the $21-$22 range seems resilient for silver, but it’s informative to note the ratio. The ratio doesn’t imply direction. Instead, the gold and silver is interesting because the correlation is historically one of the tightest locks across any pair, whether that be assets or currencies.
In the past nine months or so, there is a considerable correlation between silver and the S&P 500, speaking to silver’s industrial uses. Historically, the correlation between the S&P 500 and silver is highly variable. There is no correlation between the stock market and gold. Sometimes, they’re strongly correlated. Other times, they’re strongly negatively correlated.
The 2010-2019 period was a comparatively low inflationary environment, especially compared to the 1970s and 1980s. The gold-silver ratio found other factors with which to correlate. Consumer confidence was one of them. Something counterintuitive happened. If consumer confidence is strong, then that would favor silver rather than gold, and you’d expect the ratio to contract. The opposite happened. At the start of 2021, when the markets were starting to get some semblance of order back despite a poor economic outlook, gold was not moving much. Institutional investors took a cautious stance.
2023
Expectations of a looming recession is one key driver of the silver market at present. Over the past 18 months silver has basically underperformed relative to gold, acting in a more correlated manner with copper and other base metals. In the short term, ETFs or price sensitive applications could be a demand driver and become a supplier to the market. Looking at the rest of the decade, solar photovoltaics will be an important market for silver. At 100 million ounces per year already, demand from this sector could still explode, which could result in a further crunch of the silver supply.
Merely 30 percent of silver production comes from primary silver mines. Silver’s mine production is mostly the result of copper, gold, lead, and zinc mining. The remaining seventy percent is inelastic, meaning it won’t be increased or decreased based on demand, because the mining is a byproduct of other metals. Therefore output doesn’t respond to demand. Silver in 2023 will likely have a price inelastic supply profile. While the silver market will remain in a deficit in 2023, it won’t be as bad as 2022. The pressure on Comex and LBMA will likely ease.
(Scrap note: Scrap is another inelastic part of the market. In the 1980s, scrap poured onto the market. We could get to that point again where people are uncovering silver and melting it. When that happens will likely be a function of the speed with which the appropriate price is attained, as well as the levels of distress people face in various economies throughout the world.)
