Amidst the glimmer of precious metals, an intriguing paradox unfolds between silver and gold. Bullion analyst Sanjiv Arole offers insights into their intricate relationship and the road ahead.
Ravi Shastri was the best captain that the Indian test cricket team never had, save for just one test match. In fact, he is said to have been brutally trolled by his captain once. He reportedly said, “Dulhan to sajdhaj ke baithi hai par dulhe ka pata nahin”. Roughly translated and paraphrased it means, “The bride is fully decked up with garland in hand, but no sign of the groom”. By implication it meant that Shastri’s wait for captaincy was never ending.
Likewise, in a quirky sort of way, silver is often referred to as poor man’s gold. It has always been a bridesmaid but never the bride. Silver has often promised to outrun gold, but mainly unable to outperform the yellow metal. In the current year too, the story is much the same. Silver began the year on a positive note at $24.29 per ounce. It first fell to its lowest level for the year at $22.09 per ounce on the 10 March, 2023 (down by 9.95%) before recovering to its highest level for the year scaling $26.0250 per ounce on the 14 April, 2023, a rise of around 7% over its early January price.
Gold too fell by a modest 1.43% to $1,809.05 per ounce on 27 February 2023. However, it then climbed to its highest for the year of $2,048.45 per ounce, up by over 11.63% over its 3 January, 2023 price even as the Fed signalled a pause in the interest rates. Currently, gold is up by around 4.39% since the beginning of the year, while silver down by around 0.5% for the year so far (all prices kitco.com London pm fix on 24 August). So, what ails silver? Why is it struggling to outperform gold? Is the gold/silver ratio at play or is the huge deficit in the silver market stalling the white metal?
The ideal gold/silver is said to be 16:1. It is based on the fact that silver is found to be 16 times the quantity of gold in the earth’s crust. On 21 January, 1980, both gold and silver scaled record levels. Gold scaled its then all-time high of $850 per ounce while silver climbed to its all-time high of $50 per ounce.
Then, the gold/silver ratio of 17 was the closest to ideal ratio of 16. However, in 2011, both gold and silver reached their all-time highs again. Gold scaled its then fresh all-time high of $1,926 per ounce in September 2011, whereas silver just managed to be very close to its 1980 high of $50 per ounce at $49.50 per ounce. So, theoretically the gold/silver ratio in 2011 was 38.90. Theoretically, because silver’s foray to near its all-time high of 1980 was in April 2011 while gold scaled its fresh all-time high of $1,926 per ounce only in September 2011.
Further, the gold/silver ratio recently reached its highest level of 126 in March 2020. The long-term daily gold/silver average ratio stands at 65, however, the ratio has moved from around 17 on 21 January, 1980 to its high of 126 in March 2020. Currently, the ratio is volatile in the 78-85 range. The ratio indicates that there is still enormous potential for the silver price to soar in the near future.
It is generally observed that in bull-runs, silver climbs much faster than gold. However, when the bear phase sets in, it is gold that is much steadier of the two and silver tends to decline very steeply. As silver is both a precious metal as well as an industrial one, the silver price could outpace gold when both the economy as well the demand for precious metals is high, it is a double engine price impetus for the white metal. However, in times of recession or economic strife, while the gold price could still rise the silver price could be pulled back.
Gold usually takes over in times of crises, geopolitical tensions, as a hedge against inflation, slowing of the economy or even when it is overheated, etc. Normally thereafter, silver only tends to follow suit. However, being a cheaper metal, it is easier to move the silver price. But, since 2011, silver has consistently underperformed against gold. It was only in 2016 and the first few months of 2023 that silver seemed to outperform gold.
In the current scenario, silver is grossly undervalued, but at the same time with the ratio swinging between the mid-70s and over a hundred earlier in the year, it seems that the white metal could break away to higher levels beyond the $30 per ounce mark. It appears that the US has dodged the recession bullet at the moment. That in turn could augur well for the white metal. Moreover, there are reports about some exceptional demand for silver emanating from the industrial sector.
Overall, does the gold/silver ratio have any impact on the silver price or influence investors to buy silver just because the ratio shows vast potential for a spike in the silver price? But, one should be aware that there is no particular number as to what the ratio should be. Or at what level price movements are triggered to kick-start either on the upside or slide down. For, there is no physical, geological, chemical, electrical and financial or any other reason why either of the precious metals are expected to trade at a given set pattern to each other. The biggest influence on the price of silver is investor interest in the white metal. Apart from various other factors their decision to buy or sell silver would mainly depend on macroeconomic factors as well as well as the demand-supply factors. If these fundamental factors do not favour, then investors would refrain from buying silver just because it was an undervalued asset. If, however, all things fall in place then the upward move in silver could have some real push. Speculators too have an impact on the silver price and they may take a cue from the gold/silver ratio to help them take up positions. However, the sheer magnitude of volatility in the silver price does not make the white metal everyone’s cup of tea.
Deficit In The Silver Market
The Silver Institute in its report released in April 2023 is quoted as follows: Global demand for silver rose by 18% in 2022 to a record high of 1.24 billion ounces, creating a huge supply deficit, even predicting more shortages in the years to come. Silver recorded a deficit of 237.7 million ounces in 2022, the highest supply shortage on record. The report further stated the deficit of 237.7 million ounces coupled with 51.1 million ounces in 2021 wiped away all the cumulative surpluses from the previous decade. Further, the Silver Institute predicted that the shortage of silver in 2023 would be 142.1 million ounces.
However, in spite of the deficit in silver, the silver price did not show any appreciation in the silver price. In fact, the silver price averaged $21.73 per ounce 2022 as compared to the average silver price of $25.14 per ounce in 2021, a fall of 15.51%. The report also points out that the huge supply side shortage would not necessarily cause the price to shoot much higher automatically. For, while silver inventories are falling, huge amounts of the metal held by individuals and investors can still bridge the supply deficits.
Strangely, the last time silver was in such a huge deficit was in 1999, when demand outstripped supply by 155.7 million ounces. Then too, the average silver price had decreased from $5.54 per ounce in 1998 to $5.22 per ounce in 1999, a decline of 6.2%. It is a matter of fact that during the 1990s the silver market was in deficit for several years and the silver price was depressed well below $5 or even below $4 per ounce. The deficit in the silver market appeared to continue even during 2000 and after. But, from around 2004-05, supply of silver seemed to outstrip the demand. Yet, the silver price seemed to be rising year by year. So much so, that just before the silver price scaled $49.50 per ounce in April 2011, the surplus supplies were well over 100 million ounces in 2009, 2010 and even 2011.
Then, again after a few years of deficit, we once again saw the silver price crash from 2012-13 onwards. Then after a brief interlude that saw surplus silver supply, silver once again went into a deficit from around 2021. It raises a very pertinent question: does surplus silver actually result in higher silver prices? For, conventional wisdom suggests that supply shortage and record demand should entail higher silver prices. But, in reality it appears to be the other way round. Mysterious are the ways of silver indeed!
Unlike all mined gold, which is almost entirely with us even today, a substantial portion of silver mined over the ages that is used in industrial sector is lost, particularly from electronic goods, chemical industry, etc. For, it is not feasible to recover silver from such industrial waste easily. It is not feasible financially, technically, environmentally, etc., to extract precious metals from such industrial waste, particularly silver. Even though it is known that precious metals are present in industrial waste in landfills.
A research report on silver supply (not so long ago) estimated that more than 1.5 million tonnes of silver had been mined till date. It even estimated that 90% of all mined silver was lost in landfills. This estimate of 90% is debateable and seems to a view taken by the Western world (USA), wherein most of the silver was consumed in industrial usage. Probably, mere extrapolation has resulted in the theory that 90% of mined silver being lost to landfills. However, even that contention cannot hold ground given that currently only around 50-60% of the total demand for silver is used for industrial purposes. Therefore, much more silver is available in above ground stocks. Although, above ground silver stock has fallen tremendously over the last several decades, the quantum of such silver stock, a large portion of such identifiable stocks are with governments, is debateable.
It is this silver that fills in the gaps, in the form of official sector sales, whenever demand exceeds supply and there is a deficit in the silver market. That is the paradox in silver. Moreover, silver (more than gold) is price-sensitive. This phenomenon is seen more in jewellery and silverware markets like India and other similar markets. Therefore, once the silver price goes much higher most of the demand vanishes and on the contrary, there is a rush of silver scrap that floods the markets over time as well as official sector sales and disinvestment (more by way of official bars and coins) by all types of investors.
Silver scrap that hits the market is often silverware and heavy pure silver jewellery. Women and even men in rural and tribal India wear anklets (weighing around 500 gms each) on their bodies to be sold off when in need or when the price is very high. However, lightweight silver jewellery, often termed as trinkets may not find its way back to the markets. Then, as the price falls, demand for silver picks up and this eventually results in a short supply. This cycle repeats itself and what we see is high prices causing oversupply after a time lag and lower silver prices spurring demand and so on. Investors as well as speculators determine their strategies based on all this and take up positions.
What Happens Next In 2023?
The silver markets are agog with reports about a new technology in solar panels that would use more silver. According to a report in Kitco news, the inelastic silver supply may be overwhelmed by skyrocketing demand from solar panel manufacturers as early as later in the current year itself. Moreover, according to the Silver Institute, solar alone is 12% of all silver demand every year that was 140 million ounces last year. This is projected to soar to 160 ounces in 2023.
However, the Kitco.com report suggests that major factors have not been taken into consideration while determining silver demand. It underestimates the volume and pace of solar panel production. With China accounting for 80% of global production capacity and with China likely to install three times as much solar power in 2023 as they did in 2021. This is likely to give a sharp boost to solar panel demand in the current year. Then, as solar is the cheapest form of additional electricity output, it becomes very cheap and easy to install. Then, newer technologies are also expected to require 50 to 150 per cent more silver. Then, the International Energy Agency projected that seven times more electricity from solar power would be produced by 2030, an annual growth rate of 25%.
Further, some reports suggest that the quantity of silver that is still left underground could only last till 2030 or 2035 at best. And with around 70% of the mined silver being a by-product with other metals, there could not be a rise in silver supplies in the near future. This makes new mines and exploration for new mines imperative. But, the current price of silver does not provide enough margins for explorations in silver. Only if the silver price scales $30 per ounce would margins allow for explorations in silver.
Then, as a leading analyst based in Hong Kong said, “Substitution of silver with cheaper metals and new technology would be worth it when silver is around $30 per ounce instead of $22-23 per ounce,” the markets will not run out of silver suddenly, but “the market will restore equilibrium at a higher price.”
Finally, as far as India is concerned, the huge imports of silver seen in the year 2022 are not likely to be repeated this year or even anytime soon. There are indications that silver imports would fall by a third to around 6,000 tonnes or even below. The import of silver in 2022 was an aberration and there was more to it than just huge demand for silver. The average silver price for 2023 (till 24-8-2023) is up by over 7% as compared to the average price for silver in 2022. The demand for silver was very poor in the first half of the year even as silver hovered between Rs.75,000-77,000 per kg across various centres in India.
The weak INR against the USD made silver more expensive in rupee terms. The increase in import duty on silver to bring it at par with gold did not help demand either. However, the IIJS held in August saw good demand for gold as well as silver as the international prices cooled down a bit. Thereby, providing some hope for a better festival and marriage season for precious metals this year
Lastly, gold has scaled its all-time high levels both in the local (Rs.61,000-63,000 per 10 gms) as well as global markets ($2,048 per ounce). Silver too was close to its all-time high of around Rs.77,000 per kg, earlier in the year. However, in the global markets silver is less than half ($24.18 per ounce) its all-time level of $50 per ounce. Does it mean that the silver price has potential to double from here? Mysterious are the ways of silver indeed!