Silver Investment Demand Expected to Hit Five-Year High

Physical silver investment is expected to surge by 27% this year, according to the latest data released by the Silver Institute.

Demand for investment silver is projected to come in at 236.8 million ounces in 2020. That would mark a 5-year high.

Silver coin and silver bar sales in the US have driven the big gains in investment demand. Retails sales are projected to rise by 62% on the year. This will more than offset the drop in silver investment demand in India – the world’s second-largest silver market.

The rising price of silver has helped drive investment demand. As of Nov. 13, the white metal was up 38% on the year.

Global holdings of silver in silver-backed ETFs have also surged this year, pushing past 1 billion ounces for the first time ever. Year-to-date gains through Nov. 13 reached 326 million ounces.

As you might expect, non-investment silver demand has dropped due to the economic contraction sparked by government response to the COVID-19 pandemic. March and April saw precipitous drops in demand, but the market has shown signs of recovery since. But industrial fabrication is forecast to drop by 9% this year to 466.5 million ounces, a five-year low.

This reflects the impact of lockdown restrictions, with supply chains heavily disrupted, end-users adopting an increasingly cautious approach to inventory replenishment and factories facing labor supply problems.”

Global demand for silverware and silver jewelry is also expected to see healthy drops in 2020.

Heavy losses in India underpin the weakness in each segment. This in turn reflects the impact of widespread lockdowns (to combat the pandemic) which hit disposable incomes, elevated — and at times record — rupee silver prices, and a weak Indian economy. The world’s second-largest jewelry consumer, the US, also weakened, although the extent of the decline was more modest than for gold and heavy destocking implies a sharp turnaround soon for this market’s suppliers.”

On the supply side, mine output is expected to drop significantly in 2020. Production is projected to fall by 6.3% to about 780.1 million ounces.  The big drop in silver output is largely a function of mine shutdowns due to the pandemic, but mine output was already trending down before coronavirus. Global mine production fell by 1.3% in 2019.

The silver-gold ratio indicates that silver remains historically undervalued compared to gold.

The silver-gold ratio is the number of ounces of silver it takes to buy one ounce of gold. It has been historically high for months. It climbed to well over 100-1 back in March. We saw the ratio shrink as silver followed its historical trajectory and outperformed gold as the yellow metal climbed above $2,000 an ounce. , dropping below 70:1 in March. Now the silver-gold ratio has opened up again to nearly 77-1.  The modern average over the last century has been between 40 and 60-1.

Looking at the big picture, the biggest driver for precious metals continues to be Federal Reserve monetary policy. In order to turn bearish on gold and silver, you have to believe the Federal Reserve is actually going to tighten monetary policy and the dollar is going to remain strong. But given the massive dose of monetary heroin the central bank has injected into the economy, the Fed really has no way out. There is no exit strategy from this extreme monetary policy. That bodes well for both silver and gold in the long-term.