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The silver market is in record deficit. Are prices expected to rise?

Published by Karl Martin Karus in category Articles on 24.05.2023
Gold price (XAU-SEK)
25930,30 SEK/oz
  
- 222,70 SEK
Silver price (XAG-SEK)
320,23 SEK/oz
  
- 10,96 SEK

Global demand for silver rose 18 percent to 1.24 billion ounces in 2022. Production has been well short of demand, creating one of the most significant shortages in history in the market, which will continue for years to come, the Silver Institute said.

Last year, the silver market had a deficit of 237.7 million ounces, according to the institute’s World Silver Survey data. “This may be the most significant deficit in history,” the institute wrote. Back in December, the 2022 shortfall was projected at 194 million ounces.

Total supply (mine production and recovery) was 1.005 billion oz. However, demand reached 1.242 billion ounces.

Demand for silver increased across all key sectors:

  • Industrial
  • Investment coins and bullion
  • as well as jewelry.

Industry demand rose 5 percent to 556.5 million ounces. Investment demand, second in terms of volumes, increased 22 percent to 332.9 million ounces. Jewelry demand increased 29 percent to 234.1 million ounces, and tableware demand rose 80 percent.

The deficit eats up the previous decade’s surplus

They announced that the 2022 shortfall and 2021 deficit of 51.1 million ounces have wiped out the previous decade’s surplus. This year, the shortfall is expected to be 142.1 million ounces, which is also vast when looking at historical data. This would be the second-largest deficit in over 20 years (last year was the largest).

We are moving into a new paradigm in the market – one where the market is constantly in deficit,” said Philip Newman, one of the founders of Metals Focus, which prepared the report for the institute. He added that the deficit might not lead to a quick price increase – silver stocks are falling, but individuals and investors have a lot of silver to cover the insufficient supply.

According to the institute, the average price of silver this year will be 21.3 dollars per ounce. Last year, the average silver price was $21.73 per ounce.

According to the institute, silver inventories will have fallen by 430.9 million ounces from their peak in 2020 by the end of this year. This represents more than half of the mine’s projected output for the year. In addition, more than half of the silver held in London vaults.

After oil, silver is the most commonly used raw material in a variety of industries. According to the institute, it is used in electronics, solar panels, medicine, photography, the chip industry, and many other fields.

Silver is difficult to mine, but demand is growing

A quarter of the silver supply is derived from mines, where silver is the primary source of income. Silver is a byproduct of mining other metals (such as copper, nickel, lead, and zinc) for the rest of the production. Because there are so few pure silver mines, dramatically increasing silver production will be more difficult.

At the same time, demand is rapidly increasing. Because of its electrical conductivity, silver is essential in the electronics and chip industries. Self-driving cars, 5G technology, and biotechnology are a few examples. Because of its antibacterial properties, silver is also used in medicine and water purification systems. Providing clean drinking water will be a critical issue for many countries in the future.

Silver demand is no surprise

In a rapidly inflationary environment, the rapid growth in investment demand for physical silver is unsurprising. In general, this has not been reflected much in global market prices because the price of silver is determined mainly in the virtual derivatives market, where the situation can differ significantly from the physical market. More information can be found here. Because physical demand is high, precious metal premiums (the difference between physical silver’s buying and selling price) are also very high. They became especially severe in the United States last year.

Price is surprising

Silver is currently trading at $25 an ounce. Surprisingly, the institute forecasts an average silver price of just $21.3 this year.  The justification is the large amounts of silver held by individuals and investors. The question also arises, are they willing to sell their silver at such a low price in a deficit environment? Of course, the number of people who are eager to sell their silver grows with the price, but is it enough?

The physical Silver market is getting more detached from the virtual one

The virtual market is becoming increasingly detached from the actual physical market. With the physical market in a large deficit, we will soon see intense upward pressure on silver. Suppose the world market price of silver continues to stagnate, and the virtual market suppresses the price. In that case, the physical market will have such a large deficit that the premiums will rise even higher, and the physical and virtual markets will diverge even more. No one is willing to sell physical silver on the virtual market at the set price anymore.

 

Gold price (XAU-SEK)
25930,30 SEK/oz
  
- 222,70 SEK
Silver price (XAG-SEK)
320,23 SEK/oz
  
- 10,96 SEK

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