Silver: On its Way to Cyclical Highs Through Choppy Waters
Silver: On its Way to Cyclical Highs Through Choppy Waters
byBart Melek, Managing Director, Global Head of Commodity Strategy, TD Securities
- Concerns surrounding higher-for-longer interest rates, a lack of speculative appetite, weakening physical demand amid Chinese economic weakness, and slowing US growth, suggest the silver market is set to be looser than the projected 110Moz annual deficit this year. Very high carry costs and elevated lease rates should see more metal pushed onto the market, loosening primary markets. This will be augmented by muted physical investment and industrial demand, as the US economy slows to a crawl and Chinese economic weakness continues. Consequently, silver is unlikely to break much above US$23-24/oz for the next several months.
- As it becomes clearer, in late-2023, that the Fed and other central banks will start to pivot to a more dovish monetary policy in Q1 2024, we expect the white metal to start setting its sights on US$26/oz. Lower interest rates, firmer physical investment, and recovering industrial demand will work together to tighten supply-demand fundamentals. Our price projections are roughly in line with the median market consensus for the next several months, but they are some US$2-3 higher six to nine months out, with an upside risk.
- In the very long-term, silver is expected to trade significantly above the US$26/oz mark and should increasingly decouple from gold as its ties to the interest/lease rate environment weaken. As the global electrification transformation takes root, demand from solar panels and auto electronics is set to continue outpacing supply, which will drain inventories to levels that will make it difficult to balance the market left short by poor growth from mining and recycling.
Primary deficits don’t guarantee strong silver prices
After materially outperforming gold for much of late-2020 to mid-2021 and late-2022, silver has underwhelmed for about a year now. In 2020, prices jumped 27% to an annual average of US$20.55/oz, which was followed by another 22% surge to US$25.14/oz in 2021. However, the price dropped 13% to a US$21.73/oz annual average last year.
Last year’s decline occurred despite the fact that silver demand reached a record 1.242Boz, driven by a 5% increase in industrial demand, a 22% jump in physical investment, a 29% jump in jewellery uptake, and an 80% surge in silverware usage. The consequent record deficit of 238Moz was insufficient to prevent the price decline in 2022.
Notwithstanding an expected late-year bounce in industrial and physical investment demand, alongside another deep annual deficit of about 110Moz projected for this year, silver is currently trending at just above a modest below US$24/oz. Interest rate-driven institutional investment flows, which tilted positioning toward shorts, are overpowering expectations of stronger physical investment and industrial demand later in the year.
For now, the projected deep deficit is being overwhelmed by the highest interest rates in over two decades, as also occurred back in 2022. Investment and interest rate-driven physical inventory flows often trump tight primary physical market conditions.
Silver’s monetary and industrial metal properties a negative for now
Since the white metal behaves both as an industrial and a monetary metal, it reacts negatively to elevated interest rates and industrial demand weakness. Investors have little appetite to build long positions when rates are projected to rise or stay at restrictive levels. They also tend to reduce length, when the economy is set to slow materially, as this implies less uptake by the industrial sector.
Read the full article at: Silver: On its Way to Cyclical Highs Through Choppy Waters (theassay.com)