Commodities & Metals

Why Silver Demand Just Cannot Win Against Gold

There are many reasons for investors and consumers to want to own gold. In the current recession, savers have no opportunity to earn any real interest in Treasury bills and notes, and there is literally will be trillions of fresh new dollars in the system after all the government stimulus and stabilization money fully trickles into the system.

Silver is supposed to track gold to a certain extent, but in 2020 that just is not the case. Silver is proving to live up to its nickname the “Devil’s Metal.”

The Silver Institute has released its World Silver Survey 2020, and the group reported that global silver demand was pushed higher in 2019. While the total global silver demand grew by 0.4% in 2019, there was a 12% rise in investment. The investment demand came from retail and institutional investors alike, and the Silver Institute noted that this was investors focused their attention on the long-term investment appeal of silver.

Industrial demand was selectively strong in 2019, coming from vehicle electrification and a rebound in photovoltaics. That said, the global trade war negatively affected many industries and the total silver industrial demand was down by 0.1% in 2019.

Where the issue becomes interesting is on the classical economic theory of supply versus demand. The Silver Institute noted that silver mine supply declined for the fourth consecutive year in 2019, with a 1.3% decline to 836.5 million ounces. Driving the lower supply was declining grades at several large primary silver mines along with disruption-related losses at some major silver producers.

Primary silver production fell 3.8% to 240 million ounces in 2019. The largest production declines were seen in Peru, and those declines were followed by Mexico and Indonesia. Gains in Argentina, Australia and the United States only partially offset the other declines. Mexico was still the world’s top silver producer last year, followed by Peru, China, Australia and Russia.

Silver is often considered to be the poor man’s gold, or perhaps as “street-level” gold. Investors buy silver for many of the same reasons they would buy gold, and if the global troubles ever necessitate a barter system there are far more uses for silver as a barter instrument than gold on everyday items like food and water. The biggest issue that drives a difference in gold over silver is that central banks use gold holdings to keep their central banks strong. Nations such as the United States, China, Germany, Russia, India and France are among the world’s largest holders of gold.

Gold was recently highlighted by the BofA Securities strategists as potentially going up to $3,000 per ounce. All that stimulus money and low interest rates add up to a bull market in their eyes. The Silver Institute is calling for a rise in silver, but not to that extent.

According to the views on investment and price, the report 12% gain from investment was up at 186.1 million ounces. That was actually the largest annual investment growth since 2015, driven by a 25% increase from Europe, a 9% increase from the United States and a 5% gain from India. The report said:

Institutional investment fared even better than retail demand. Last year, exchange-traded product (ETP) holdings stood at 728.9 million ounces at year-end, up by 13%, achieving the largest annual rise since 2010.

Notably, money-managers’ net positions in Comex futures went from being short over much of 2018 to consistently positive in the second half of 2019. Coins and medals saw a 13 percent increase in demand over 2018, rising to 97.9 million ounces, while bar demand remained solid at 88.2 million ounces.

Combined, these were the key drivers for the 15 percent intra-year rise in the silver price to a three-year high of $19.65 last September. The 2019 yearly average silver price of US$16.21 was 3 percent higher than the 2018 average price.

The higher net-physical investment strength was offset by lower jewelry and silverware demand trends in 2019. Jewelry showed a 1% drop to 201.3 million ounces as soft demand coming from India and China weighed on silver. The report said:

In contrast, Thailand achieved a 13 percent increase last year and growth was also registered in Indonesia, Japan and Italy. Silverware fell by 9 percent last year almost entirely due to lower demand from India.

There were gains in recycling and a drop in hedging in 2019. The Silver Institute showed total recycling rose by 1.3%, led by gains in industrial, jewelry and silverware. While hedging activity rose in the second half of 2019 to 15.7 million ounces, the first global hedge book increase since 2014, net supply from the official sector was down to 1 million ounces.

Despite some weakness, the Silver Institute is expecting a recovery in silver prices. Its 2020 outlook comes with the caveat that the uncertainties presented by the COVID-19 pandemic are making forecasts very challenging when looking out for the rest of this year. Demand from industrial fabrication, jewelry and silverware are currently expected to be lower ahead as a result of the global pandemic fallout. Mine supply is expected to decline again in 2020 with a temporary shutdown of several significant silver mining countries affecting the output.

At the same time, physical investment in silver is expected to rise again by 16%. That would represent a five-year high, and the Silver Institute is expecting that investors will rotate out of equities with a favorable view in safe haven vehicles. These factors were shown to add up for silver to test $19.00 per ounce again before year’s end. Silver was last seen trading at $15.43.

The real reference gains and losses can be seen in the silver ETF versus the gold ETFs. The iShares Silver Trust (NYSEARCA: SLV) shows just how bad the carnage has been in silver versus gold, with a drop of more than 16% so far in 2020. Gold has risen, with the SPDR Gold Shares (NYSEARCA: GLD) trading up 11% so far in 2019. Compared to a year ago, the key gold ETF is up almost 32%, versus a 1.5% drop for the silver ETF.

Meanwhile, the VanEck Vector Gold Miners ETF (NYSEARCA: GDX) was last seen up just 4.4% so far in 2020.

The Aberdeen Standard Physical Precious Metals Basket Shares ETF (NYSEARCA: GLTR) aims to track the price of physical gold, silver, platinum and palladium in a basket. This ETF is up just 0.1% so far in 2019 but is up nearly 22% from a year ago.