CPM Group: Recession, Recover, Repeat

The modest economic growth that was projected for 2020 is all but a memory now, thanks to the deep market rout brought on by the global COVID-19 pandemic in March.

A liquidity dash for cash and “collateralization requirements for people who had leveraged accounts” saw silver largely lose the price gains it made in late 2018 and early 2019, falling as low as US$11.94 an ounce.

The white metal has inched higher since then, but is still under pressure on a variety of fronts, as was explained in CPM Group’s 2020 Silver Yearbook presentation on Tuesday (April 28).

In January, the precious metals research group had expected slower real growth over the calendar year, with a recession period down the road between 2023 and 2025; however, those figures were left at the wayside as countries began entering lockdowns and curtailing mining operations and economic activity.

“Now we’re looking at a very deep recession in 2020 (and) into 2021 a recovery, and then another recession still in 2023 to 2025,” said Jeffrey Christian, managing partner at CPM Group.

Christian cited data from the International Monetary Fund, which states there will likely be a 3 percent decline in global economic activity in 2020 — the largest one year drop since the Great Depression. That will be followed by a recovery of as much as 5.8 percent next year.

The head of CPM Group explained that he believes these numbers are too reserved.

“We think that they probably underestimate the depth and length of the recession,” he said. “Our view is that you will see the recessionary conditions probably linger longer than a lot of people thought.”

Growth in Q3 ahead of the US election could be a precursor to the recovery of 2021, although it is likely to be muted and potentially delayed depending on the trajectory of coronavirus infection rates.

Christian’s colleague, Rohit Savant, then gave a presentation on investment and supply and demand fundamentals for the versatile metal.

In 2019, investment demand for silver hit 36 million ounces, a 9 million ounce increase year-over-year. But despite the increase, last year still saw the lowest level of investment-focused purchases since 2006.

In fact, compared to the 197 million ounces acquired in 2009, 2019 was 82 percent lower, explained Savant, who is vice president of research at CPM Group.

“So this is declining, and the low level of investment demand in recent years helps to explain to a very large extent silver’s lackluster price performance that we’ve been seeing,” he said.

According to Savant, it is tactical silver investors who have controlled the price by buying on the decline and selling when prices rise, locking the white metal in a very narrow trading range.

“We expect silver investors to continue buying the price declines; however, they are expected to be less aggressive sellers when prices rise, which we believe will help to increase the net investment amount during 2020,” said Savant.

Silver investors are also expected to be cautiously optimistic this year, adding to their holdings and bolstering demand.

“Silver investment is forecasted to rise and reach about 79 million ounces in the current year, which would be the highest level of net investment since 2016,” he added.

Prices won’t see a sharp increase in the short term as continued pandemic uncertainty creates volatility, but CPM Group has a positive outlook for the fabrication metal in the medium to long term.

Another area that is projected to experience an uptick is silver coin purchases. In 2019, demand in this space reached 79.8 million ounces, a very meager year-over-year increase.

In 2020, Savant expects coin demand to reach 86.8 million ounces, which is a significant year-over-year uptick, but still lower than the high levels hit between 2010 and 2016.

While investment and coin demand remain reserved, silver exchange-traded funds (ETFs) have been wildly successful.

“Investors have continued to add metal to their holdings this year, and (ETFs) actually reached a new record high of 821.3 million ounces on April 17,” said Savant. “At the end of last week, net additions to ETFs for 2020 stood at about 78 million ounces, so pretty close to what we had for … last year.”

In terms of headwinds, a dip in fabrication demand, which is one of the most important end uses, will work against the white metal’s price ascent. Demand in this space fell for the first time in six years in 2019, coming in at 926.4 million ounces, which is down from 928 million ounces in 2018.

Trade tensions between China and the US, which weighed on both economic sentiment and growth, prohibited the metal’s ability to grow in 2019. A phase one trade deal between the two nations could have been a motivator this year, but all of that potential was derailed by the COVID-19 outbreak.

“Fabrication demand is forecast to decline during 2020, driven primarily by the disruptions to supply chains and the decline in demand due to the negative economic fallout from the containment efforts of the coronavirus,” Savant said.

Total silver demand from this sector is estimated to fall to 859 million ounces.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.