Modern Mining June 2023

COMMODITIES OUTLOOK

Silver’s strong fundamentals to persist, but downward price pressure will eventually emerge By Metals Focus (Independent precious metals research consultancy)

2 023-to-date has seen a sharp rally in silver prices, along with exceptionally high vola tility. From a trough of $19.90 mid-March, the white metal surged by over 30% to a one-year high of $26.14 by early May. This was soon followed by heavy profit taking, which has pushed prices back below $24 at the time of writing. A return of interest among institutional inves tors has been the key driver behind silver’s recent strength, as increasing financial turmoil has raised gold and silver’s safe haven appeal. Even with government intervention, there remains much uncertainty regarding what the ripple effects of the recent banking stress will be on global financial con ditions. In addition, the risk that the US government will default on its debt cannot be ruled out entirely. All this has raised market expectations that the Fed will cut interest rates in H2.23. Crucially, this has also undermined the dollar and pushed yields lower, which has cut the cost of carrying precious metals. Disconnect between silver’s fundamentals and investor sentiment Although 2023-to-date has seen a major recovery in investment inflows, much of this has been fuelled by economic factors. By contrast, even with increasingly favourable supply-demand conditions since 2021, this has not been sufficient to convince professional investors to raise their exposure to the white metal. Indeed, one of key themes for the silver market for 2022 was that the metal posted what may well have been the largest deficit on record. Underpinning this outcome was a record year for all major areas of

A return of interest among institutional investors has been the key driver behind silver’s recent strength, as increasing financial turmoil has raised gold and silver’s safe haven appeal.

2022 was also a record year for silver bars & coins, jewellery and silverware fabrication. (Source: Phillip Gavriel & The World Silver Survey) silver demand, while global silver supply remained little changed in 2022 year-on-year. That said, insti tutional investors were either bearish or indifferent towards silver over much of 2022, as faster mon etary tightening weighed on sentiment. With another sizeable deficit expected for 2023, global silver inventories by the end of this year will have fallen by 431 moz from their end-2020 peak. To put this into perspective, it is equivalent to over six months’ mine production, and more than half of the inventories held in London vaults offering custodian services, as reported by the LBMA. Industrial demand on track for another all‑time high in 2023 Making up for almost a half of total silver fabrica tion (48% over 2010-19), industrial offtake is by far the largest demand component for silver. Despite a challenging economic backdrop, global silver indus trial fabrication hit successive all-time highs over 2021-22. The strength of silver industrial uses reflects sev eral favourable structural factors, which are likely to persist for the foreseeable future. Among these, a shift to green economy applications, in particular the notable growth in photovoltaics (PV), has been a key driver. With countries’ efforts to lessen their reliance on fossil fuels and improve energy secu rity, silver should continue to benefit from rising PV installations. That apart, silver applications have also been lifted by electrification within the automo tive segment, the rollout of 5G networks and other investments in power generation and distribution. This builds on cyclical factors, such as overall GDP growth. Some uses, for instance PV, will see fur ther thrifting in silver use, but overall it is expected to remain slight. All this explains why we expect indus trial demand to achieve a new all-time high in 2023.

10  MODERN MINING  June 2023