Silver Outlook 2024: Constrained supply, rising demand, and USD weakness could see silver overshoot forecasts

Silver is in a paradoxical position at the start of 2024. On the one hand, industrial demand for the precious metal continues to grow, particularly from the solar and electrification sector, and supply remains constrained. On the other hand, total demand actually fell 10% in 2023, and prices remained stuck around $23 per ounce as the year drew to a close.

Silver investors may be wondering how these two things can be true at once, and what it will take for the gray metal’s price to finally take off. According to Peter Krauth, editor of SilverStockInvestor and author of The Great Silver Bull, the situation is complex, but the outlook for 2024 and beyond remains very favorable, with the Fed set to provide even more upside than current projections are accounting for.

“To me, it's not the end of the world,” Krauth said of this year’s drop in demand. “What I think is more important, if you want to get a one-number perspective on what's going on, is to look at the deficit, and the deficit is still high. It's not an all-time high, but it's still the second highest on record. In fact, if you add together the deficits of the last three years, it's nearly half of the entire supply for this year.”

Demand is correcting, not collapsing

Krauth noted that the biggest drivers of this year’s drop in overall demand are the jewelry, silverware, and physical investment sectors, which were due for some correction after the outsized demand of 2022.

“That's not a big deal,” he said. “Nearly all of these were at record highs, or coming off record highs, so it's not completely surprising. If you look at jewelry and silverware in particular, India was this huge demand factor for 2022, so it's only reasonable that because they did so much buying last year, it's almost like they overstocked. It's not unrealistic to see a little bit of lightening up in terms of total demand.”

“Jewelry was a big contributor to that, silverware less so, but jewelry dropped by about 50 million ounces,” Krauth said. “That's maybe 5 percent of the total supply. But the big one was net physical investment, which was down about 70 million ounces from 333 to 263 million this year. If you add the two together, you're looking at about 12%. That 12% drop accounts for overall lower demand by about that same percentage.”

“Physical investment was off the charts last year, 333 million ounces,” he said. “And if you look at jewelry last year, also off the charts, 235 million ounces. These two categories were just so outsized compared to where they've been, so it's just not all that surprising that we're seeing things come back down to earth a little bit.”

Supply won’t be able to catch up

Krauth said the deficit represents the true net position that the market is in, and the data on the supply side of the equation shows that mining and recycling won’t be enough to meet next year’s demand.

“If you look at supply, it's very telling that mine production is down 2% when demand is at the second-highest level on record, and recycling is expected to grow only 1% this year, and will have little impact because it's maybe 15% or so of overall supply,” he said. “I think the attractiveness of pulling that silver out of people's hands or inventory to make it to recycling is hard to justify, and it's also hard to justify given the silver price. So I think that will pretty much max out at its current level, around 180 million ounces or so.”

A significant bump in mining production also isn’t in the cards. Krauth pointed out that when Bank of America Global Research surveyed the top 13 silver producers about their supply outlook earlier this year, “the consensus was basically, ‘we're not revisiting the 2016 highs in mine supply for any number of years going forward.’ There are just too many challenges when it comes to funding, permitting, building, all the constraints of bringing a new mine to market are there and they're just getting tougher and tougher.”

“The mine supply is really over 80 percent of total annual supply,” Krauth said. “So when mine supply is not going to grow, and yet we have all of these very realistic forecasts that demand is going to continue to grow in a very healthy way, that the deficits are going to stay very much elevated for years to come… I just have a hard time seeing how supply is ever really going to catch up.”

Long-term demand is trending upward

The demand forecasts have indeed been high. A report by Oxford Economics for the Silver Institute projects total demand growth of 42% between now and 2033, which is double the growth rate of the last ten years. Even demand from jewelry and silverware, which pulled back so dramatically in 2023, is projected to rise by 34% and 30%, respectively in the coming decade, and these two accounted for 60% of total silver demand this year.

Krauth said that even with the projected slowdown in global growth in the first half of 2024, he still expects some recovery for jewelry and silverware demand in Asia. “I do know that Southeast Asia, places like Bangladesh and Sri Lanka, they do accumulate silver, and they do see it as money,” he said. “I do think recession is likely next year, so I do think we're going to see some ongoing pressure, maybe not a huge bounce back in jewelry or silverware.”

Where he does see an outsized recovery in 2024 is from the investment community. “I do think that net physical investment is going surprise somewhat to the upside,” Krauth said. “[Demand was at] 163 million ounces this year. I think we're probably looking at high two hundreds, maybe 282-290 in terms of net physical investment for 2024. And then ETFs, I think that we're going to see a surprise there as well. Even if we continue to see a fair bit of softness in jewelry and silverware, I think both sides of investment, net physical investment and ETFs, are going to surprise strongly to the upside and help push overall demand higher next year.”

Krauth acknowledged that while a significant economic slowdown or a recession would likely boost investment demand, it would also be expected to negatively impact industrial demand, silver’s strongest growth sector.

“I don't want to discount industrial,” he said. “Some people will say if we get a recession, is that going to impact silver? I guess the short answer is potentially yes, but probably less than we might expect. A lot of the reason for that is there's so much growth and support for solar, and these green transition trends are going to continue because they're all mandated. Solar is going to continue to surprise on the upside.”

Bank outlooks support strong case for silver prices

The ongoing strength of the solar sector is one of the common themes in the commodities forecasts from investment banks, many of which are predicting significant appreciation of silver prices in 2024.

Analysts at TD Securities said they believe silver prices could see a difficult start to the new year, but lower rates, rising industrial demand and the return of investor interest will push the white metal to outperform in 2024.

Much of that performance is predicated on burgeoning solar demand, along with increased interest from investors. “In industrial metals, for the very first time, the green boom may be sufficiently strong to offset weakness in traditional demand sectors, whereas restocking by industrial users and speculative positioning should help the recovery,” they said. “The white metal will benefit from lower carry costs, improved industrial demand later next year, and primary market deficits.”

They noted that because silver is both an industrial and a monetary metal, elevated interest rates and weak industrial demand are a double whammy. “Investors have little appetite to build long positions when rates are projected to rise or stay at restrictive levels,” they said. “They also tend to reduce length when the economy is set to slow materially, as this implies less uptake of the white metal by the industrial sector.”

Once the economic recovery is in view, the analysts expect silver prices will get further support from strengthening industrial demand, “which could see the white metal target $26/oz mid-2024. At that time, lower interest rates, firmer physical investment, ETP purchases and industrial demand will work together to tighten market conditions.”

“Since silver has a high beta to gold, with double the rate of volatility, the white metal is projected to outperform during this phase of the rally,” they added. “The precious metals complex typically reacts long before the actual cuts in rates occur, which implies that long exposure may start to drive prices materially higher in the late part of the third quarter.”

Krauth agreed with TD’s analysis that the factors holding silver back in 2023 will become supportive by the second half of 2024, but he thinks they’re actually being too conservative.

“I think that we're going to see silver reach closer to $28 in the first half of this year,” he said. “And in the second half of next year, we could potentially see it reach as high as $30.”

JPMorgan’s commodity analysts were even more emphatic about their case for silver prices. They predict that silver will be among the few areas of strength in the broader commodities sector.

“Across commodities, the only structural bullish call we hold is on gold and silver,” they wrote, adding that “a breakout rally is expected around midyear 2024.”

JPMorgan also expects silver prices to reach $26 per ounce by mid-year, and $30 in 2025. The investment bank added that they have “the highest conviction on a bullish medium-term forecast for both gold and silver over the course of 2024 and into 1H25.”

Commodities analysts at BMO Capital Markets, for their part, upgraded their already positive forecasts for silver prices in their 2024 outlook. The analysts said that commodity price estimates would typically move down amidst slowing global growth and muted industrial output. “However, on a combination of several short-term and long-term factors around supply, demand, and costs we have in the main upgraded our outlook,” they wrote.

While the most notable increase was to gold price estimates, which were boosted between 12% and 17% over the coming years and which should help pull up silver prices, silver’s own fundamentals and market dynamics have earned the gray metal a 5% increase in BMO’s price projections for 2024.

BMO also expects to see an increase in sovereign wealth funds and alternative investment funds “looking to secure physical material based on expectations of longer-term price appreciation, which could see investors competing with consumers for materials,” they said.

“On the back of this, the model of metal lending, already well-established in precious metals, may thus become more prevalent in energy transition metals and critical minerals,” the analysts wrote. “This is over and above the wider trend of emerging market de-dollarisation and diversification of holdings, which we expect will continue to underpin gold and potentially silver demand again in 2024.”

BMO expects gold and silver to outperform in the second half of 2024, “with the latter boosted by higher penetration rates in new solar technologies.”

“Silver simply cannot decouple itself from the fortunes of gold, and the two will typically move together in any given cycle,” the analysts wrote. “However, silver does offer more torque at points of inflection, partly due to liquidity, and partly due to the different way the market trades.”

BMO also noted that silver is more likely to see significant growth in industrial demand compared to gold “and, importantly, an energy transition angle though use in photovoltaics and power grids.”

De-dollarization may do for silver what it has for gold

Krauth said the prospect of growing monetary reserves by governments combined with strategic reserves to support industry could be a very powerful new driver for silver prices if it occurs. “If you start to see governments step in… it's really curious how silver has yet to have been declared a critical metal in some of the bigger places,” he said. “But I would argue it's at the very least a strategic metal. You can hardly argue that, given how important it is to solar panels.”

The implications of de-dollarization and diversification increasingly boosting demand for silver as they have for gold over the last two years are also profound. “That’s dramatic to consider,” Krauth said. “I'm not convinced that this balance that we have in bonds and treasuries is going to be long-lived. We have this reprieve now where we've had rates falling for a while. But I think that we are in what I’ve been calling the inflation decade, and I think that's going to continue, and that we're in a secular bear market for bonds.”

“When this finishes playing out, maybe six months, maybe nine months or so, and bonds start to drop again and their yields start to go up, think about all these Treasuries that are owned by major central banks as reserves,” he said. “They start to see these billions and trillions of dollars of holdings falling, the stuff that's supposed to be the absolute safest thing in the world, and that can be and has been weaponized. They're going to just want to pick up the pace and get rid of that stuff even faster.”

“Gold and silver are the ultimate anonymous liquid alternative,” Krauth said. “We talked about strategically, the applications for silver in particular as a critical metal. “But also in terms of sovereignty, these things can start to become a lot more attractive. And we know that major nation central banks want to move away from the dollar.”

Krauth said the latest numbers from the Silver Institute also vindicated his own bullish projections for this year’s solar demand.

“They were saying that they expected solar was going to represent 161 million ounces of demand for 2023 back in April, and I thought that was much too low,” he said. “I said we're going to be closer to 180 to 190 million ounces, and I was proven right, because when they revised in November, they said, ‘okay industrial is 632 million ounces, a record high for industrial, and solar we're revising to 30 percent of industrial.’ If you do the math, that's 190 million ounces. So I was saying 180 to 190, and they were at the top end of my expectation.”

Fed cuts, dollar decline could see silver rocket out of recession

Krauth said that investors need to keep in mind that even the latest forecasts from the banks and the Silver Institute are based on data up until November, so they don’t account for the latest projections from the Federal Reserve.

“I would agree that, pardon the pun, the Fed meeting was pivotal,” he said. “Bonds became very attractive, because they figured ‘we're not going to get these rates anymore,’ so the market started to buy bonds up like crazy. But the drop in yields also affected the dollar, and I think the dollar is something that we need to consider very seriously.”

Krauth noted that the dollar index peaked at 107 in November, and then it fell to 104. “Then, in the wake of the Fed meeting, it dropped to 102,” he said. “We're already below 102. We're going to definitely head towards 100 in the dollar index and likely below, especially as the market starts to increasingly price in these rate cuts, and the weaker dollar is very supportive of silver.”

“We cannot discount the potential action around a recession, because silver does not do as well as gold in a recession,” he said. “It does better on average before, it does worse during, so that there's narrow middle part of the recession, and it also does better coming out of a recession. What's key here is that these forecasters did not expect this kind of outcome from the meeting, and I'm willing to bet that it's going to change their forecasts, because it seems that the market didn't fully expect it either, as it started to rally very strongly after that. So I think that we are going to start to see revisions to the upside for precious metals.”

Krauth said that the dollar’s decline will have a significant impact on prices, but also on the gold:silver ratio, which is often a major factor in catalyzing the start of silver’s bull run.

“Obviously, lower bonds make the U.S. dollar less attractive, foreigners who don't have dollars don't need to buy dollars as much anymore if they're not going to buy U.S. bonds, because they would have dollars to buy bonds,” he said. “And the rate cuts should weaken the dollar. They're cutting because then the downside risks become higher than the upside risks of inflation. And then we know that, silver being more of an industrial metal than gold, if the Fed starts cutting, then the market looks forward and says, we're going to have this recession. It's going to play out, and then because they've cut so much, as we come out of it, silver is going to be a big beneficiary, because of the industrial bounce back.”

“And if silver is going to be a big beneficiary, then we're going to start to bid up silver. So silver starts to outpace gold in that case.”

Read the full article at:  Silver Outlook 2024: Constrained supply, rising demand, and USD weakness could see silver overshoot forecasts | Kitco News