Silver: More sensitive to the economic situation

07/03/2019 | 10:38am

One step forward, two steps back. This formula perfectly characterizes the evolution of silver prices over the past five years, probably even more so long as prices have declined since 2011 (when the ounce of silver was worth nearly USD 45).

Even the significant rebound in gold in recent weeks has not allowed, to the great dismay of some investors, to break this dynamic and this feeling of endless decline. Proof of this is that if the ounce of gold progresses by nearly 7% over the month of June, silver hardly gains 4.5%, whereas it is generally accepted that it amplifies the movements of the gold metal.

Another way to understand the supremacy of gold over silver is to study the gold/silver ratio, at its highest level in nearly 30 years.
Gold/silver ratio - source Bloomberg

This almost interrupted decline in money thus raises, quite rightly, many questions about the continuation of this underperformance.

Industry is a major contributor to physical demand

A brief analysis of the components of physical demand can help to shed some light on this problem that is so damaging to the grey metal.  Unlike gold, silver is at the heart of a technological and industrial shift that some players cannot do without. According to data from the Silver Institute, silver-consuming industries combined account for 55.9% of demand, far ahead of jewelry (20.5%) and ingots (17.5%).
World silver supply and demand - source: World Silver Survey 2019

Contrary to popular belief, the solar panel sector is not representative of the most energy-intensive activities in terms of money, whose place belongs to the electronics industry as a whole. The use of money has indeed evolved over time to make its place in the world of new technologies, with varied outlets (semiconductors, robotics, energy storage, etc.). Silver is therefore significantly sensitive to the evolution of the ecosystem of future technologies, at least this is one of the conclusions of a study by MIT, which classifies silver as one of the most essential metals for the development of certain sectors.
Metals most impacted by new technologies - source: MIT

At first glance, one might think that this distribution of demand is an asset for silver, whose prices could be boosted by more catalysts than gold. However, it is also a weakness, since the fate of money is mechanically linked to economic cycles, various macroeconomic indicators and other production indices. If this idea were to be taken to its extreme, then silver could be considered for inclusion in the base metals compartment.

No supply stress on the horizon

Mainly resulting from secondary mining production, associated with the extraction of a main metal (lead, zinc...), production stabilizes at under 900 million ounces, a base allowing to avoid the risks of supply shocks, especially since there is no shortage of ongoing mining projects. Latin America dominates silver production, as evidenced by the weight of Mexico, Peru, Chile, Bolivia and Argentina, which together account for more than 50% of the world's silver mining production. While Mexico leads in terms of production, Peru has the largest estimated silver reserves.
Top 20 producing countries and mining companies - source: World Silver Survey 2019

Note the growing influence of China, which is not surprising when it comes to metal markets. The Chinese ogre is actually increasing its production year after year, and is now the third largest producer in the world. As such, southern Mongolia is a hotbed of interest and could become the new silver rush following the discovery of a super deposit of more than 100 million tons.
Jordan Dufee 2020
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