Silver Supply, Demand to Fall in 2020; Price to Approach US$19

Mine production in the silver sector fell for the fourth consecutive year in 2019, but global investment climbed 12 percent as both retail and institutional investors bought the white metal.

According to data from the Silver Institute’s latest World Silver Survey, released on Wednesday (April 22) and produced by Metals Focus, 2019 also saw an uptick in demand from the industrial segment as a result of automotive electrification and a resurgence in photovoltaics.

“Although the escalating trade war between China and the US weighed on industrial offtake last year, losses were broadly mitigated by favorable structural changes,” reads the report.

“Photovoltaic demand registered an impressive 7 percent increase in offtake, rising to its second highest annual level,” it continues.

Investor demand also recorded its highest jump since 2015, climbing 12 percent to 186.1 million ounces. Meanwhile, exchange-traded products boosted their holdings by 13 percent, soaring to 728.9 million ounces — the largest annual growth since 2010.

These gains were further heightened by a 1 percent decline in global mine supply last year.

COVID-19 adding “tremendous” silver uncertainty

The comprehensive report also examines the short- and long-term impact of COVID-19 on the white metal’s supply and demand fundamentals moving forward.

Speaking to the Investing News Network, Philip Newman, director of Metals Focus, noted silver’s 2019 gains, but emphasized that the current coronavirus pandemic has brought unmeasurable uncertainty into the overall markets, as well as the resource space.

“To say it’s cast in tremendous uncertainty is an understatement. We realized that with the figures we put together, we had to make a judgment call,” he said. “We didn’t want to be sensationalist in our views. But we fully recognize that this is probably one of the most uncertain forecasts we have ever put out there.”

Silver’s duality as a metal with both precious and industrial aspects will also complicate its outlook this year. While its precious metal attributes should be a catalyst for price growth, with investors looking to hedge against losses, the white metal’s ties to the industrial metals space are likely to limit these gains.

“Silver behaves as both a precious and industrial metal — half of demand is industrial, and that is certainly weighing on silver,” said Newman. “And as you see that weakness in base metals that can drag silver lower, so you got those forces pulling in opposite directions — you’ve got the upside because of gold, the downside because of base. And so that is weighing on it for the time being.”

Strong ETF interest a silver lining this year

One area that has seen sustained growth already in 2020 is silver exchange-traded funds (ETFs). So far this year, ETF holdings have increased by 65 million ounces, a new record high for the sector.

Metals Focus expects silver ETFs to continue to make gains this year.

“If you look at the profile of investors in gold ETFs versus silver, gold tends to be more towards institutional and high net worth, (and) silver is much more towards the retail side,” explained Newman. “And I think the retail side is much stickier.”

The founding partner of Metals Focus pointed to 2013, when prices were correcting and gold ETFs fell drastically, a drop that wasn’t replicated in silver ETFs.

“I think that this argues in favor of the fact that retail holdings are much stickier,” he said. “We think there will be continued (in general) strong buying of ETFs — we’re not expecting to see liquidations because that’s not really the nature of those that are buying ETFs, who tend to be of the buy and hold mentality.”

Investment in physical silver is also projected to grow this year.

“Silver physical investment is forecast to extend its gains this year, with a projected 16 percent rise to a five year high as investors rotate out of equities in search of safe haven vehicles,” notes the report.

Silver supply and demand seen falling, price to rise

Though 2019 saw a return in demand from the photovoltaic side, the current massive upheaval, particularly in China due to COVID-19, will no doubt derail the sector’s growth.

Metals Focus’ now-adjusted forecast for the space has silver demand slipping 3 percent year-over-year, but as Newman pointed out, that doesn’t tell the whole story.

“That may look pretty modest, but before that we were expecting quite an increase next year, and so the downturn is much greater than just a minus 3 percent compared to 2019.”

Mine production is expected to fall 5 percent this year to 797 million ounces, while overall global supply is expected to sink by 4 percent to 978 million ounces. That would be its lowest level since 2009.

Falls in output will be further compounded by significant growth in coin and bar demand, which is pegged to climb 16 percent this year. Net physical investment is also projected to see a third straight year of growth, rising 16 percent to 215 million ounces.

The white metal’s close ties to its sister metal’s safe haven nature will be beneficial in the long term, even as industrial demand weighs on gains; however, Newman also made a case for silver’s industrial growth.

“Maybe countries will be looking at how do they kickstart their economies, and maybe that’ll be growth in infrastructure spending,” said Newman. “I think that could benefit silver.”

In the long term, Metals Focus sees the silver price rising from its current US$15 per ounce level.

“We have the silver price hitting a high before the end of (the year) of US$19, but even at the same time, we still see the (gold/silver) ratio around the 90s at year end. But bear in mind of course, the market is very small, it doesn’t take much money coming in to have those more pronounced moves in silver.”

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

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.