Yes, silver prices have been plunging since 2011. But know this: demand for silver is booming while supply is shrinking. The grey metal is due for a big squeeze.
If You’re Not Watching Silver Prices, You’ll Hate Yourself Later
The nice thing about the grey metal is that, unlike gold, a substantial amount of demand comes from industries.
Silver has been a staple component in industries for many decades. Its outstanding electrical conductivity makes it a necessary component in a many electronic devices. Silver oxide batteries have also been gaining popularity. In addition, silver has a significant presence in the automotive industry, with more than 36 million ounces being used annually in automobiles. (Source: The Silver Institute, last accessed July 22, 2015.)
One industry that is going to have a huge demand for silver is solar energy. This is because silver is a crucial part in the making of solar panels. It is used to conduct electricity out of solar cells. According to the Silver Institute, the use of silver in solar panels is on a tremendous scale: it takes approximately 2.8 million ounces of the grey metal to generate one gigawatt of electricity from solar panels.
As the earth gets depleted of fossil fuel and coal power plants continue to pollute the air, the future of solar power has never been better. By 2014, around 645,000 U.S. homes and businesses had equipped themselves with solar panels. (Source: Solar Energy Industries Association, last accessed July 22, 2015.) Moreover, the number is expected to grow a lot further.
The growing adoption in solar energy has brought significant demand for sliver. Back in 2000, only one million ounces of silver were used in photo voltaic cells to make solar panels. By 2013, the usage of silver in solar panels had surged to 64.5 million ounces and is expected to grow to 100 million ounces in 2015. (Source: PV-Tech, last accessed July 22, 2015.)
Silver Mining Stocks are Getting Killed
At today’s silver prices, silver mining companies are shrinking their production of the grey metal. In Canada, production of silver slowed down substantially. In each month in the first half of 2015, mine output of silver declined year-over-year. (Source: Natural Resources Canada, last accessed July 22, 2015.)
Mind you, most of the silver produced does not come from silver mining companies, but as a byproduct when mining other metals such as gold, zinc, and copper. Precious metals prices have tumbled dramatically over the past few years. For many gold mining companies, today’s gold price is approaching or already below their all-in sustaining costs.
Once other mining companies shrink their production of other metals, the production of silver as a byproduct will decline, too.
There has already been indication of a shortage for physical silver. Right now, the spot price of silver is at $14.76 per ounce, while the futures price is at $14.73 for delivery in September. This is odd, because there is an arbitrage opportunity here: investors can sell their silver in the physical market, and buy it back in the futures market and profit. By doing so, investors could also avoid the storage costs during this period.
But investors are not taking advantage of this opportunity, because they are not sure if they can get their silver back when the futures contracts are due for delivery. This kind of counter-party risk only occurs when the demand for physical silver outweighs the supply.
When you have demand higher than supply in the physical market, very soon it will translate to price increases, both in the physical market and the paper market. I wouldn’t be surprised if the grey metal doubles its price in the upcoming months.