Investing
While silver seems to be perennially in gold’s shadow, that wasn’t always the case. For centuries, millennia even, silver was the currency of the common man. The Roman denarius was the primary coin used in the Western world for centuries. The Roman system of the libra, solidus, and denarius influenced the British currency system of the pound (£), shilling (s), and penny (d), with the pound sterling denoting a weight of silver. Modern currencies such as the mark, dollar, and drachma all derived their names from historical currencies that were defined as specified weights of silver. And until the mid-1970s, it wasn’t uncommon in many countries of the world to still see silver coins in everyday circulation.
Those days are obviously behind us, at least for now, and we live in an age of fiat currency and government money creation ex nihilo. The prospects for a return to gold or silver currency are uncertain, but one thing is certain – silver is very much still in demand.
In fact, many silver industry analysts point to a growing disconnect between supply and demand that will only widen in the future. How large will that gulf grow? Read on to find out.
Silver demand differs from gold in that roughly 50% of demand comes from industry, with the rest of demand coming mostly from investors and jewelers. When demand from industry falls, demand from investors normally makes up for the shortfall, or even pushes demand to new highs.
Total silver demand is expected to grow again in 2020, largely thanks to significant increases in demand from investors. Silver, like gold, is considered a stable asset and store of value. When investors look to protect their assets against depreciation and financial turmoil, they look to gold and silver.
Investment in physical silver increased over 12% from 2018 to 2019, and is expected to increase another 16% in 2020. If the economy continues to weaken into 2021, expect that demand to continue increasing.
Even more impressive than the increase in physical demand is the net investment in exchange-traded products, which is expected to increase 47% in 2020. That, too, should increase in 2021 if the economy continues its downward trend.
One peculiar aspect of the silver market is that silver supply and demand don’t always match up. In some years, demand outstrips supply, and physical stores of silver in warehouses have to be drawn down. In other years, supply exceeds demand, and above ground silver supply builds up.
With investor demand for silver increasing, and with production from mines decreasing, markets may become dependent on silver recycling to keep supply and demand in balance. But if recycling fails to bridge the gap, the next few years could see silver in short supply.
The biggest problem facing those who want to invest in silver right now is acquiring silver. For investors who want to invest in silver through a silver IRA, for example, they need to buy silver coins or bars. Silver in warehouses around the world doesn’t do any good for those investors until it’s minted into coins. Similarly, silver in the form of good delivery bars doesn’t do silver IRA investors any good because the size of those bars (1,000 ounces) is far larger than most silver IRA investors are willing to buy.
While some investors may be willing to buy 1,000-ounce bars, bars of that size can be difficult to sell, especially once they’re removed from a good delivery warehouse and stored with a silver IRA custodian. Most investors are better served by silver bars in the 1-ounce, 10-ounce, or 100-ounce sizes, which are far more readily available and easier to liquidate if silver IRA investors want to take a distribution from their silver IRA account.
Thus, the supply of actual silver available to investors wanting to invest in silver is necessarily constrained. And given the fact that some mints around the world have had to temporarily shut down minting operations due to COVID-19, this means the supply of silver available to investors is at risk of shrinking. Many silver investors have found it difficult to locate physical silver coins and bars to invest in, and with COVID remaining a threat around the world, the likelihood of continued COVID-related supply disruptions to silver markets shouldn’t be underestimated.
Saying that silver is in short supply doesn’t mean that silver isn’t being produced. It just means that demand for silver is likely to outstrip supply. Total silver supply in 2020 is expected to be the lowest it has been in a decade.
Each year about 26,000 tonnes of silver are produced from mines around the world. Primary production of silver is quite limited, with much silver production coming as a byproduct of mining for gold, copper, tin, nickel, lead, zinc, and other metals. With mining becoming ever more resource- and capital-intensive, and therefore more expensive, production of silver will decrease in the future. And if a slowing economy means less mining production of base metals such as copper, nickel, and zinc, then production of silver will likely decrease too.
Silver production decreased in 2019 for the fourth consecutive year, with 836.5 million ounces mined, versus 890.8 million ounces in 2015. Primary production of silver comprises less than 30% of that total mine production. Preliminary estimates for 2020 expect about a 5% fall in total mine production of silver.
Aside from mine production, the only other major source of silver is recycling, primarily of electronics. Computers, smart phones, dental equipment, and solar cells are all major users of industrial silver, and thus are prime sources of recycled silver. But silver recycling is actually a minimal source of silver, comprising about 15-18% of silver supply in any given year. And since 2011, silver recycling has actually decreased almost 30% in the amount of total silver it supplies to the world silver market.
Even with silver prices having risen significantly in 2020, total supply from silver recycling is expected to fall slightly this year. While one might expect silver recycling to increase next year if silver prices continue to increase, there just may be a limit to how much silver is available to recycle, and that limit may not be able to increase significantly.
Although gold has industrial uses too, its demand isn’t nearly as affected by industrial demand as silver is. About half of silver’s demand is the result of industrial demand from several different industries. And moves within those industries can result in significant changes in demand.
Traditionally, the photography industry was a significant user of silver, with film production being a major source of demand and recycling within the industry being a significant source of silver supply. With the nearly universal replacement of photographic film with digital cameras, the photography industry has largely ceased to be a major source of demand, with about 3% of global silver demand coming from the photography industry.
Solar cells, or photovoltaic cells, have become an increasingly large portion of silver’s industrial demand. About 20% of silver’s industrial demand consists of photovoltaics, up from 13% in 2011. That’s about a 40% overall increase, and with solar energy playing an increasingly important part in green energy initiatives, demand for silver from the solar industry should only continue to increase.
In places like California, which now requires solar panels for all new residential construction, those types of measures will naturally lead to an increase in silver demand. Worldwide, the number of rooftop home solar systems is projected to double by 2024. Conservative estimates expect total solar panel power production worldwide to more than triple by 2030. And some analysts are even expecting total solar energy production to increase 20-fold by 2030. All of that will require a huge amount of silver to make solar panel production happen.
Obviously silver, like gold, is heavily used to make jewelry. Nearly 20% of silver’s demand comes from the jewelry industry and, while that can fluctuate from year to year, the long-term trend has generally been positive, with demand in 2019 nearly 25% higher than it was in 2011. And even with dramatically higher silver prices in 2020, jewelry demand for silver in 2020 is expected to be 16% higher than it was in 2011.
Demand from investors accounts for nearly 20% of silver’s demand as well. This is the sector of demand that is perhaps most subject to huge increases that can affect silver supply. Already the silver industry expects silver demand from investors to increase 15-20% this year, and that number could easily be surpassed as the economy continues to deteriorate throughout the rest of the year.
Non-photovoltaic industrial silver demand makes up roughly 40% of silver’s annual demand. This can be anything from electronics to medical equipment to batteries. Numerous industries use silver, and in some cases they can be very sensitive to the silver price. Other industries continue to develop new uses for silver, with much research having been done over the years to use silver in place of other metals such as lithium, platinum, and palladium.
What does the future hold for silver? Will the silver supply continue to fall? What will happen to silver demand? And what does that mean for silver prices today?
Silver is a capital-intensive industry, and many mining firms rely on debt financing to fund their operations. With the corporate debt bubble threatening to burst, and a wave of corporate downgrades threatening to freeze up bond issuance, there’s a high likelihood that many mining companies will have to curtail their operations because they won’t be able to raise enough money to continue operating at current capacity.
Since the majority of silver production comes from secondary capture at mines looking for gold, lead, copper, and other metals, silver mining production is likely to fall as industrial demand for those other metals decreases. As economies across the world slow and fall into recession, decreased demand for mined metals will impact production of silver as well as base metals.
Because recycling of electronics plays a large role in silver recycling, and because people are likely to hold onto their electronics longer during periods of recession rather than replace older electronics, we can expect production of silver from recycling to decrease as well. While this might not have as much of an impact as a drop in silver mining will, it nonetheless will impact silver markets.
Now that we’ve covered the possible impacts to the silver supply, what about silver demand? Will falling industrial demand hurt silver, or will the increased number of people wanting to invest in silver make up for it?
Industrial demand for silver is expected to fall about 7% in 2020, a consequence of slowing economies around the world. Demand for silver in photovoltaic cells is only expected to fall about 3%. Given the strong and continuing demand for green energy, the solar industry should continue to provide a bright spot for industrial silver demand in the future.
Demand for silver from the jewelry industry is also expected to fall this year, which is only natural. With slowing economies, households are going to have less money to spend on luxury items and expensive frills like jewelry. Still, silver demand from the jewelry industry is significantly higher than it was at the beginning of the decade.
Silver investment demand is expected to increase over 15% this year, following a 12% increase in 2019. This is the biggest wild card, as the weaker the economy gets, the greater silver demand will be. It’s very possible that increased demand from investors will more than offset the fall in demand from industry. In fact, that was the case in 2009, as total silver demand increased slightly from 2008 even during a weak economy, all due to the massive increase in demand to invest in silver.
Market prices of silver coins and bars have always commanded a significant premium to spot prices, and that has been the case ever since the 2008 financial crisis. With the recent supply crunch, those premiums can be expected to continue.
If you’re looking to invest in silver, and especially through a silver IRA, you’ll want to make sure that you work with a firm that can get you the silver you want when you want it. Through Goldco’s partnerships with major world mints, we offer one of the best selections of silver coins and bars available to silver IRA investors, including many coins not found elsewhere.
With the future of silver looking to be one of increased demand, decreasing supply, and therefore increased prices, it makes sense to stock up on silver today while you still can. Contact Goldco’s experienced representatives today and find out how you can make silver a key component of your investment portfolio.
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