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Silver Is Significantly Underpriced Given the Looming Supply Shortage

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Given the current macroeconomic environment and the supply and demand dynamics, silver is significantly undervalued at $24 to $25 an ounce.

The bullish case for silver in the mainstream typically revolves around price inflation. There are certainly reasons to think inflation is stickier than the powers that be want to admit and that the Federal Reserve isn’t going to be able to win the inflation fight. That is bullish for both silver and gold.

But I don’t hear a lot of people in the mainstream talking about the looming supply shortage in the silver market.

In fact, the growing demand for silver in the solar power industry will likely put a significant squeeze on supply in the coming years, and the current price of silver does not reflect the likely shortages.

While the mainstream hasn’t talked much about this, people in the industry are aware of what’s going on. In an article published by Seeking Alpha, Silver Bullion Pte Ltd. CEO Gregor Gregersen mentioned that he “was intrigued by unofficial chatter about upcoming silver scarcities due to rapidly growing photovoltaic demands” during the Asia Pacific Precious Metals Conference.

We’re already seeing a squeeze on the supply of silver. While silver demand set records in every category in 2022, supply was flat with mine output falling by 0.6%. This resulted in a 237.7 million ounce market deficit in 2022.

It was the second consecutive annual deficit in a row. The Silver Institute called it “possibly the most significant deficit on record.” It also noted that “the combined shortfalls of the previous two years comfortably offset the cumulative surpluses of the last 11 years.”

This trend is not expected to reverse. As Gregersen noted, silver mine production has fallen due to a lack of investment.

Production cannot be materially increased over the short term as it can take over 10 years to commence new mining operations. Therefore, increased silver prices will not lead to increased mine production for a long time.”

Meanwhile, the demand for solar power is rising rapidly and that is going to drive the demand for silver significantly higher.

The International Energy Association (IEA) predicts that in 2023, investment in the solar power industry will exceed the amount of money flowing into oil production.

Due to its outstanding electrical conductivity, silver is an important element in the production of solar panels. It is used to conduct electrical charges out of the solar cell and into the system. Each solar panel only uses a small amount of silver, but with the demand for solar panels growing exponentially every year, those small amounts of silver add up.

According to a research paper by scientists at the University of New South Wales, solar manufacturers will likely require over 20% of the current annual silver supply by 2027. And by 2050, solar panel production will use approximately 85–98% of the current global silver reserves.

A few years ago, analysts projected that the amount of silver used in solar panels would fall. After all, silver is expensive and there is a strong incentive to find alternatives. In fact, the amount of silver used in the production of solar panels has been reduced by about 80%. But that trend is expected to reverse. The Australian paper noted that more efficient ‘N-type’ technologies now being developed require even more silver than current ‘PERC’ cells that make up more than 80%of the current market. TOPCon and SHJ panels require 30 to 80% more silver than the older technology.

Some argue demand for silver in solar energy production will eventually flatten as the industry develops cheaper alternatives to the white metal. But according to the paper, even if the industry reduces the use of silver, demand will still increase.

The results show that the current rate of reduction in silver consumption is not sufficient to avoid increasing silver demand from the PV industry and that the transition to high-efficiency technologies including TOPCon (a more advanced N-type silicon cell technology, first scaled in 2019) and SHJ (Silicon heterojunction solar cells, which are very efficient) could greatly increase silver demand, posing price and supply risks.”

Recession worries would typically dampen industrial demand for silver, but the photovoltaic industry is essentially recession-proof due to support from governments around the world. With battling climate change a priority, it is highly unlikely investment in solar power and other green energy technologies will fall, even in the midst of an economic downturn.

All of this signals a rapid increase in silver demand in an environment of constrained supply.

Economics 101 tells you that higher demand without a corresponding increase in supply will lead to increasing prices.

Gregersen summed it up this way.

This demand cannot be satisfied by financial derivatives, nor can it be the kind of unallocated silver which are often sold without substantial backing for investors. Photovoltaic demand is poised to drain global physical reserves of silver. Should the 2024 production capacity reach 1,000 GW as predicted by IEA, the required photovoltaic silver demand would likely surpass 500 million troy ounces of silver by mid-decade. It is very unlikely that such demand could be satisfied without drastically higher silver prices or much higher physical metal premiums.”

Silver isn’t currently priced for this dynamic.

In fact, silver is significantly undervalued compared to gold.

The current silver-gold ratio is just over 81-1. That means it takes over 81 ounces of silver to buy an ounce of gold. To put that into perspective, the average in the modern era has been between 40:1 and 50:1. Historically, the ratio has always returned to that mean. And when it does, it does it with a vengeance. The ratio fell to 30-1 in 2011 and below 20-1 in 1979.

Historically, when the spread gets this wide, silver doesn’t just outperform gold, it goes on a massive run in a short period of time. Since January 2000, this has happened four times. As this chart shows, the snapback is swift and strong.

Gregersen wrote that it is only a matter of time before the mainstream picks up on the dynamics in the silver market.

In conclusion, the photovoltaic industry’s impending impact on silver pricing cannot be overlooked. As the silver shortages loom on the horizon, it is only a matter of time before mainstream media reports on these significant developments. Once the news spreads, we can anticipate substantial price surges in the silver market.”

Now is the time to buy while silver is effectively on sale.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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