Posted on November 22, 2021
By Paul Vanguard, for BullionMax.com
It does seem like everyone's buying silver these days, even if the paper market price might not show it. We know that investment demand has been skyrocketing, and now, the latest report from the Silver Institute tells us that this year's demand will total 1.29 billion ounces. It's the first time silver demand has breached the annual 1 billion ounce mark since 2015, and much of this huge increase in demand comes from industrial uses.
And that's despite the fact that the manufacturing sector as a whole is hardly outperforming these days.
China's industrial demand, for example, is expected to pass its annual all-time high this year, according to precious metals consultancy Metals Focus. This is largely due to the Chinese government's green energy framework, which will expectedly make heavy use of solar panels and electric vehicles, both which rely heavily on silver during manufacturing.
Solar panels being the preferred choice, by a wide margin, when it comes to trendy renewable energy certainly doesn't hurt. But there's demand coming on all fronts.
Metals Focus highlighted a recovery in Indian demand, along with the accompanying growth in the jewelry sector, as just one important source. Not only jewelry, though - silverware is in strong demand in India, as well. India regularly ranks as the third largest industrial consumer of silver in the world, after the U.S. and Japan.
India's industrial demand has come most strongly from the pharmacy and chemicals sector.
In addition, one idiosyncracy of Indian silver sales: zeri (or jari), a gilded silver thread used in embroidery, is incredibly popular in northern India for decorating and enhancing formal garments. (Gold thread is used, as well, and it's a very interesting tradiont. You can read more about it here.)
Where is the silver coming from, though? Despite a 6% increase in mine production due to re-opened mines that were temporarily closed last year, Metals Focus said that we're on track to see a supply deficit of 7 million ounces.
This is the first time that the market has seen a deficit since 2015, and the timing couldn't be better from a fundamentals perspective.
We know that silver's supply side is considerably worse than gold's, which itself has a mediocre supply picture on a good day. There's a simple reason for this: 72% of the world's silver is mined as a by-product of another metal. You can't just ramp up production. Silver miners must consider the value proposition of digging up, smelting and refining tons of copper, lead or zinc in order to get the silver. The economics just aren't as straight-forward as gold mining.
As always, some insider information can offer insight into just how bad things are in this regard. Hecla Mining CEO Phillip Baker, whose company covers some 40% of all of the newly-mined silver in the U.S., told Kitco that he shares Metals Focus' bullish outlook on silver.
Baker very much noted that investors will be looking to hedge their bets and store their wealth over what looks to be a lengthy inflationary stretch. Yet, as the Silver Institute underscored, it could be the manufacturing sector that ends up causing silver's price breakout. Demand for renewable energy is growing exponentially, and so does the need for silver as a critical component of "green energy" manufacturing. Silver's combination of conductivity and corrosion resistance make it vital in both solar panels and electric vehicles (nearly every single electrical connection in an electric vehicle uses silver). This means an even greater demand deficit down the line, which should mean pricier silver (unless someone is messing with the market).
So just how big is this silver deficit we're looking at? Consider the Green Creek mine in Southeast Alaska, one of the largest primary producers of silver in the world, responsible for some 10 million ounces every year. In order to meet growing demand, Baker said that seven to ten new mines of this magnitude would need to be opened. If even one such was opened in the next few years, it'd make for the biggest news the mining industry has had in a while.
On the other hand, an ongoing shortfall in silver supply would be good news for folks who already stacked their silver bars and coins in the anticipation of price appreciation. Nothing drives prices higher than growing demand in the face of fixed supply.
Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.