LAWRIE WILLIAMS: Silver disappoints – again
Despite the recently-released World Silver Survey from the Silver Institute, prepared by specialist precious metals consultancy, Metals Focus, pointing to a fourth successive year of demand exceeding supply, silver prices have still been extremely disappointing for the metal’s followers - particularly in the past week. Both gold and silver are turning down again in early trading today too.
One might have anticipated a strengthening in the price with global inflation rising along with the Russia/Ukraine conflict, but in recent days both silver and gold prices have been showing some strong degrees of weakness – silver in particular as can be seen with the Gold:Silver Ratio (GSR) rising back to above the 80 level again. (The higher the GSR the less favourable it is for silver vis-à-vis gold). Equities and bitcoin have been looking weak too, while the U.S. dollar Index has been rising in anticipation of an above average U.S. interest rate increase at the early May FOMC meeting.
The Silver Institute’s survey does not hold out many crumbs of comfort for the silver investor, despite the prediction of yet another year of demand exceeding supply in 2022. On the other hand, we are perhaps a little more optimistic for the prospects for both of the most-traded precious metals. Contrary to the Survey, our prediction is that the US Fed will tighten the economic screws, in terms of interest rate rises and balance sheet reductions, faster than the equities markets will be comfortable with, in turn leading to a further sharp U.S. stock market downturn. This will likely be followed by bourses around much of the rest of the world which could well result in a safe-haven counter move in the major traded precious metals.
In our opinion, the Fed is unlikely to be able to raise interest rates sufficiently to have much, if any, discernible effect on inflation which will leave real interest rates comfortably in negative territory, which is seen as overall positive for gold. Silver tends to follow gold’s price path, and if past performance is anything to go by, it may well also rise the faster in percentage terms with the GSR coming back a few notches accordingly, although still by not nearly enough to meet the aspirations of the silver bulls..
The Silver Institute survey sees silver demand posting steady gains in the next few years to successive record highs. Industrial demand for instance is expected to see initial gains as economies continue to recover from the pandemic and through structural change. Much of silver’s improving industrial demand picture is reckoned to be in growth sectors. But any price impact as a result will likely be limited and will take time.
Good examples of the industrial growth areas are photo voltaics (principally solar panels) and in the demand growth for electric-powered vehicles; both hybrids and even more so battery electric vehicles. These have higher silver loadings than internal combustion engine equivalents and so this shift, which will be aided by government legislation banning production and sale of internal combustion engine driven light vehicles, already being introduced in some markets, should help drive rapid silver demand growth.
Offtake in the current leader for green economy silver usage - photovoltaic demand - should also see modest gains in the next few years as capacity additions fuelled by both lower CO2 targets and a desire to boost energy independence will counter ongoing thrifting. Overall, pressure from the latter and outright substitution however should stay modest due to prices not being seen as excessive and with the easy “wins” behind us.
Jewellery demand is also expected to see yet faster growth. Much will come from assumed global recovery from the Covid pandemic, in particular any lift to consumer sentiment, coupled with the possibly softer to static prices foreseen in the Survey (with which we may not at least wholly agree) - which would increase demand in key geographical areas where buying is more price sensitive – like India. This would easily offset the negative of a swing in consumer expenditure to services, especially travel. The impact of possibly lower, or static, prices should, according to the survey, also be more keenly felt in silverware with a potential boom in Indian offtake in particular, leading to double-digit gains for the global total. Photographic demand, though, is set to fall again this year and into the future, albeit perhaps marginally as an x-ray backlog continues.
Investment demand is much harder to quantify. There are always the out and out silver bulls who will buy the metal regardless and are almost always continually disappointed when the anticipated price growth fails to materialise - but next time .....
Silver’s reputation for price volatility too will put much of the general and institutional investment community off, though. ETF additions and withdrawals have been extremely volatile so do not give us that much of a guide.
On the supply side, the Silver Institute survey sees annual mine production continuing to rise with Mexican and Chilean output in particular in a growth phase. Russian output is rather more uncertain, though, with sanctions likely to affect access to key Western equipment and technology.
So, while the Silver Institute is pretty much neutral to marginally negative on any silver price growth in the year ahead, we do see inflation-related geo-economics pushing the gold price upwards and silver also seeing a price increase riding on gold’s coat tails. Which will be correct, if either, remains in the balance. Prospects look decidedly mixed and the forward price pattern will likely depend on geopolitical and/or geo-economic developments primarily impacting the gold price with silver following in gold’s path.