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Fundamentals Look Good for Silver in 2018

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All kinds of factors impact the price of precious metals, but supply and demand are the most fundamental. With that in mind, the stage seems to be set for silver to have a strong year in 2018.

According to the Silver Institute 2018 Market Trends report, the silver market faces growing demand and shrinking supply in 2018.

Silver quietly gained over 6% in 2017. Even so, the white metal was considered an underperformer. Meanwhile, the silver-gold ratio remains historically high. This means silver is undervalued compared to gold. Currently, the silver-gold ratio stands over 78 to1. This means you can buy 78 ounces of silver with one ounce of gold. Compare that with the historic average ratio which hovers around 16:1. The modern average over the last century is around 40:1. As Peter Schiff said in a video over the summer, “This is silver on sale.”

But if supply and demand dynamics are any indication, the sale won’t last.

Industrial applications represented about 60% of silver offtake in 2017. According to the Silver Institute, industrial demand will continue to grow in 2018, with the solar energy sector leading the way.

Due to silver’s unrivaled electrical conductivity, it will continue to play a vital role in major industry sectors that are moving towards increased electrification, such as automotive. Although silver is used in small quantities in some applications, the diversity is large, and the continued rising volumes of applications are expected to again have a positive impact on silver consumption from industrial products this year.”

About 92 million ounces of silver were used in solar panel production last year.

We expect the growth to continue this year and set another record for silver demand, driven by large-scale solar capacity additions and continued strong demand uptake from individual households, particularly in China.”

The Silver Institute also sees a steady increase in silver jewelry demand in 2018, projecting a 4% increase. This follows 1% growth in the market last year. Jewelry production accounts for about one-fifth of silver demand.

The market for silver coins fell through the floor last year, mainly due to sagging demand in the US. Sales nearly halved in 2017.  Weak sales in the US mirrored soft demand for gold in North American markets. Peter Schiff talked about sagging US investment in gold last summer during an interview at International Metal Writers Conference noting that a lot of the investors who typically buy gold in America voted for Trump, and they’re no longer worried about the economy. As a result, they’re not buying gold. They’re not buying silver either. They’re buying stocks instead. The rapid rise of cryptocurrencies may have also diverted some investment away from precious metals.

The Silver Institute expects some rebound in both of silver bar and coin market this year.

With equity and bonds in ‘expensive’ territory and Bitcoin’s stratospheric increase taking a breather during the beginning of 2018, we expect some investment to flow back into precious metals, benefiting silver bar and coin demand this year.”

The institute also projects a 3% increase in metal flowing into silver-backed ETFs in 2018.

Finally, growing demand for the white metal in India will help push global demand higher in 2018. We tend to think of India as gold country, but Indians also have a cultural affinity for silver. The country is one of the leading sources of world silver demand. Imports of silver into India nearly doubled to 183 million ounces in 2017.

This healthy demand will be set against a backdrop of tight supply.

Global mine supply fell 1% in 2016, the first annual decline following 14 years of consecutive growth. In 2017 that trend continued with mine output expected to contract by a further 2% to 870 Moz. Production disruptions out of South America, along with a decline in capital expenditure among the primary producers in the past five years, is expected to constrain output again this year.”

Taking both sides of the equation together, the Silver Institute expects a market deficit in 2018. Silver from above ground stocks will have to be drawn down in order to serve the shortfall.

These supply and demand dynamics signal increasing prices in 2018. Add to that the possibility of economic chaos and geopolitical risk. Now may be the best time to take advantage of “silver on sale.” The sale may well end soon.

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