Precious metals lost their shine in the past year. Silver has been the hardest hit as its price plunged even more than gold. However, if you take a look at the supply and demand of the grey metal, you’ll see that the trend is about to reverse. And when that happens, expect silver prices to shoot through the roof.
Silver Price Forecast Shows Higher Spot Rates Ahead
Silver mining companies are getting killed at today’s low silver prices. The production of silver comes from two major sources: silver mining companies and silver as a by-product when mining other metals. On both ends, the amount of silver coming to the market is shrinking.
Silver mining companies are shrinking their production because for many companies, today’s silver price of $14.93 per ounce is below their all-in sustaining costs. The more they mine, the more money they lose.
As a by-product, silver is shrinking as well. The reason is simple: metals prices have tanked significantly, and whether they are mining gold, copper, or zinc, companies are having a hard time. Take gold for instance. Today’s gold price of $1,096 is below many companies’ all-in sustaining costs.
Let’s take a look at Canada, a major player in the mining scene. 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 August 10, 2015.)
If production supply is going to shrink, what about scrap supply? Well, on that front, there is hardly any supply of silver.
You see, scrap silver comes from jewelry, and for someone to sell their jewelry, they need a good price. Under today’s low precious metals prices, people are unwilling to part with their jewelry.
Moreover, on the topic of scrap metal, we have to keep in mind the cultural factor. There has been a trend of physical gold and silver shifting from the West to the East. And in Eastern cultures such as China and India, you never sell your gold and silver. That is, even when precious metals prices bounce back, people will not sell their metal.
Unlike gold, silver is actually used extensively in industries. It is the best electricity conductor known to man and is an essential part of many electronic devices. Moreover, silver oxide batteries have been gaining popularity in recent years. Silver also 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 August 10, 2015.)
One big pusher for silver demand in the upcoming years is the solar energy industry. Silver is a crucial part in the making of solar panels as it is used to conduct electricity out of solar cells. According to the Silver Institute, it takes around 2.8 million ounces of silver to generate one gigawatt of electricity from solar panels.
The demand for silver from solar energy is already booming. 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 August 10, 2015.)
Then there’s the investment demand, which typically accounts for around 18% of total demand for silver. The recent turn of events is about to make precious metals shine in the eyes of investor again.
Note that from June 12th to July 8th, the Shanghai Composite Index plunged 32.1%! This level of stock market crash was unseen before and sent investors panicking and looking for safer places to put their money. Where is the safer place? Precious metals: in the first four trading days of July, settlement volume on the Shanghai Gold Exchange increased by six fold to 597 tons. (Source: Ifeng, July 9, 2015.)
Silver is another Chinese favorite when it comes to investing. Every year during the Chinese spring festival, silver coins with the year’s animal zodiac always get sold out quickly. Under severe market uncertainty in China, I wouldn’t be surprised if investing demand for silver surges in the upcoming months.
Yes, the recent downturn in precious metals prices has resulted in a lot of investors leaving the market. The drop in investment demand last year was nearly 20%. However, what this means is that the remaining investors are likely to be strong on their positions: if they managed to hold their silver during the recent downturn, they are probably going to hold it until silver prices bounce back.
So there it is, simple demand and supply analysis shows that silver prices have nowhere to go but up. I wouldn’t be surprised if the price of the grey metal doubles, or even triples in the near future.