Despite favourable circumstances supporting the rise of silver prices, the metal remains constrained by headwinds like crypto and increased mining supply among others. Precious metal analyst Sanjiv Arole studies the silver data through the decades to predict which way the metal could be headed.
Running with the hare and hunting with the hounds is a saying that seems apt for silver, fits it to a tee. For, the white metal is both a precious metal as well as an industrial metal. As an industrial metal, it accounts for around half of the total demand for silver globally.
Industrial demand for silver in 2021 (Silver Survey 2022 from The Silver Institute by Metal Focus) was around 15,800 tonnes (508 moz). Of the total demand, jewellery accounted for around 5,598 tonnes (180 moz); while silverware’s share was about 1300 tonnes (42 moz) and investments in silver was over 8600 tonnes (278 moz).
Therefore, in a period of economic growth, industrial activity gives a boost to demand for silver. On the other hand, in times of lower growth, inflation and geopolitical tensions, demand for silver as a safe haven improves as the white metal follows gold as a bulwark against torrid times. After all, silver is also known as “the poor man’s gold”.
So, what’s in store for silver in 2022, particularly, in the backdrop of the pandemic-hit 2020 and 2021? These two years were enigmatic for silver. The rest of the precious metals scaled new all-time highs in recent times—gold scaled $2067 per ounce in August 2020 and again very near that mark this year, palladium has repeatedly scaled fresh highs of over $3,000 per ounce in recent times, even platinum scaled its all-time high of $2,243 per ounce in 2008. But silver has failed to cross its all-time high of $50 per ounce scaled in 1980; though in April 2011 it came very close to the mark.
In 2020, the average price of silver was $20.55 per ounce with a high of $29.86 per ounce, whereas, the average silver price was $25.14 per ounce, with a high of $30.10 per ounce in 2021. However, in rupee terms, silver scaled Rs.75,000-plus per kg in April 2011 and thereafter has come very close to that mark crossing Rs.75,000 per kg in August 2020 and Rs.73,500 per kg in May 2021. Currently, at around $21 per ounce, silver has a long way to go. Or in other words, great potential to scale all-time high levels!
But it has not been a bed of roses for silver, as there have been long periods when the silver price had been confined in a narrow range of $3-8 per ounce from 1980s till early 2000s.
In fact, throughout the late-1980s and the whole of the 1990s, the market was forced to absorb large quantities of silver unhoarded from private stocks. This was due to the silver investment boom around 1980 when the white metal scaled $50 per ounce. Silver was offloaded into the market from mid-1980s and well into early 2000s. Silver supplies flooded the markets then and the demand failed to match up and as a result, silver prices were depressed over many years.
Economic constraints meant that the safe haven status of both the precious metals, gold and silver, was adversely affected in that period. Gold prices too were depressed with a low of around $253 per ounce in the late 1990s. So much so, that even gold failed to cash in on the US attack on Iraq in 1991 (in fact, it fell by $10 per ounce on the day the war broke out) and other geopolitical tensions.
With the Western world, barring the US, in economic strife in the 1990s, both the drivers of silver failed to fire, and silver was hit by a double whammy. Therefore, the white metal was depressed till almost 2003, at least. In early 2000s, this source of silver supplies dried up (sellers were fewer and new buyers emerged).
Since 2006 or so, there was a great deal of investment activity in silver and with an end to the surplus silver in the market, demand for silver exchange-traded funds (ETFs) picked up and the average silver price rose to over $11 per ounce in 2006 and $13 per ounce in 2007. Therefore, when the sub-prime crisis pushed the global economy into a tailspin, silver followed gold to reap the benefits from quantitative easing by the Fed to pump-prime the economy. Investors flocked the gold and silver ETFs and it was silver that came within a whisker of its 1980 high of $50 per ounce in April 2011 first; gold later scaled its then all-time high of $1926 per ounce in September 2011.
Coming to the present, the LBMA released its Annual Precious Metals Forecasts for 2022 in February. The average silver price for 2022 was predicted at $23.54 per ounce. The high for the year was forecast to be $35.2 per ounce while low was to be $15 per ounce, the range being $20.2 per ounce.
Philip Klapwijk of Metal Focus, while making the forecast in January, opined that growth in demand from silver’s use in photovoltaic installations and the auto industry’s thrust towards battery-powered vehicles would help support silver above $20 per ounce in 2020. However, economic development during the year is expected to prompt a new wave of investments in gold, and silver should also benefit, however, not as spectacular as one might hope. But, with mine supplies expected to rise by 7%, the upside in silver would be constrained. Then, greater profits perceived in crypto could further hamper the silver price.
During the presentation of the Silver Survey on April 20, Philip Newman of Metal Focus mentioned that the key driver for silver was institutional investments in the first half of 2022. In the second half, he saw negative industrial off-take, record high recovery in jewellery, silverware and physical investments. However, all of which could be offset by rise in mine supplies. He added that silver could climb to a high of $29 per ounce on hawkish rate trends that could boost investment demand. However, as interest rates rise, investors could liquidate and bring silver down to $21.50 per ounce.
Looking back at the fundamentals in silver during 2021, demand outstripped supply by 51.8 moz (1611 tonnes) for the first time since 2015 and the largest since 2010 and even much earlier. However, professional investor’s lack of appetite for silver reflected on the lower silver price. As mentioned earlier, silver demand was robust across almost all sectors. It rose by over 19% in 2021 and estimated to grow further by 5% in 2022. It must be noted that inflows of ETPs was around 65 moz (2,020t), still a far cry from the 331 moz (10,299t) in 2020. But a steady inflow of scrap in the last decade and now rising mine production have put the brakes on the silver price in recent times.
If one looks at fundamentals of silver in India, it tells a different story. The break-up in silver demand in India varies substantially from global trends. India’s silver demand for jewellery and silverware account for over 2600 tonnes, while industrial off-take is just over 1050 tonnes. Investments in India are in the 850-900 tonnes range and demand for bars and coins are around 210 tonnes. Silver imports in 2021 were 2773 tonnes, up from 2080 tonnes in 2020, but still 50% shy of the 2019 imports of over 5900 tonnes.
However, the silver story in India has its own idiosyncrasies as well. Lack of transparency is the bane of silver markets in India. According to Metal Focus, in its 2021 Silver Survey, Indian investors bought more than 630 moz (18000t) of investment products over the last decade on hopes that silver would revisit its 2011 peak. The survey also revealed that 1000 tonnes were sold in the second half of 2020. But recycling since 2011 was around 2667 tonnes. This could lead us to another unsolved mystery for silver in India.
All of the above raises more questions than giving any clarity on the issue. Does it mean that there is still a huge quantity of silver still hoarded by investors, in spite of silver scaling Rs.75,000 per kg in August 2020 and Rs.73,500 per kg again in May 2021? Or has it been offloaded in unofficial trades? Hopefully, all such questions will not crop again once silver exchange-traded products (ETPs) become the norm and all silver is traded through electronic exchanges. One sincerely wishes that it is not just a pipe dream!
Finally, a reality check on price forecasts made by analysts and experts the world over. Silver closed 2021 at $23.08 per ounce, it jumped by over 13% to scale its high for the year so far at $26.17 per ounce on 9th March 2022. Thereafter, the silver price fell by over 25.5% to $20.84 per ounce on 13th May. It recovered and ended at $22.03 per ounce on 20th May 2022 (London PM Fixed).
Whatever fireworks expected in silver during the first half of the year appear to have fizzled out. Going forward, the main drivers of silver are rampant inflation worldwide, interest rate hikes proposed by the FED and other central banks (already the recent 0.5% hike has seen bourses tumble, precious metals taking a hit, etc.), geopolitical tensions, threat of yet another Covid-19 wave and so on.
The Ukraine war has already sent all estimates on inflation through the roof. It could be tough for the Fed to sustain it aggressive stance on interest rates hikes. If that fails to control inflation and reduce the balance sheet, then gold as well as others in the precious metals basket could only soar. But the Fed Chair Jerome Powell appears only to be focussed on taming inflation. Fingers crossed!