A new period of deficits appears to be developing in the silver market. Last year saw the highest shortfall on record as supply lagged demand by 237 million ounces.

The primary drivers were a 5% increase in industrial demand, a 29% increase in jewellery demand (mainly from India) — and a 22% increase in physical investment (bars and coins)1 . Mined silver supply remained consistent, however, at near 800 million ounces.

The industrial applications of silver, as well as the growing demand for bars and coins ensures that most of the new mine supply will continue to be allocated to these sectors. Over the last two years, however, institutional demand via the exchange-traded products has been relatively muted. Given the size of the exchange-traded fund flows, institutional demand for silver and gold has been shown to have a greater impact on the spot market prices for these metals.

Silver is in deep structural deficit

Global silver supply and demand market imbalance
Silver squeeze
A good illustration of this was the Internet-inspired “silver squeeze’’ in 2021 that drove popular exchange-traded products to allocate more than 100 million ounces over a three-day period, causing the spot price of silver to rise 15% to $30 per ounce. So far, institutional flows into silver have been brief but powerful, demonstrating the influence that significant capital movements have on a relatively small market.

Silver, like gold, has above-ground stocks that can absorb a structural deficit for a period of time. In fact, one of the key reasons why gold and silver have been ideal choices as money throughout history is their high stock-to-flow ratio. However, as commodity dynamics exert increasing influence on the spot price and silver inventories fall, we believe there is an increasing likelihood of a future squeeze. According to data from industry group LBMA, silver holdings in London have fallen to their lowest level since 2016.2
Silver holdings in London 2016-2022
Silver is frequently mischaracterized as solely an industrial metal, despite the fact that it trades with an 80% correlation to gold — much higher than other base metals. The strong historical link between silver and gold demonstrates that silver is, first and foremost, a monetary metal (in many languages silver translates into “money’’), but it is also an important component in an ever-expanding list of industrial applications. Silver industrial demand (applications include electric vehicles, 5G technology and solar photovoltaics) is increasing at a steady 5% per year and is essential for a green energy transition.

Silver has a higher beta, or volatility, profile than gold due to the relative size of daily trading volumes between the metals — silver is more sensitive to capital movement. Another indication that silver is a monetary metal is that the bullion trading desks frequently trade XAU/USD (gold in dollars) and XAG/USD (silver in dollars); there are no currency codes for copper, tin, etc. Finally, while gold is approaching its all-time high of more than $2,000 per ounce, silver is less than 50% from its all-time high. Given its high correlation to gold, silver might offer greater value for investors at a time of ongoing fiat currency debasement, ie “de-dollarisation.’’

The Silver Institute has forecast another large deficit for silver this year – 142 million ounces, which would be the second-largest shortfall in more than 20 years.

What does this supply imbalance mean for investors? We see potential momentum for silver from a powerful combination of factors including demand from professional and retail investors, the burgeoning green economy and ongoing constrained supplies.

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