As a physical commodity, silver is ultimately driven by supply and demand. Trends for the past few years show that demand for silver is growing, but supply is dropping at the same time. 2020 could see both of these issues exacerbated and the silver price continue to rise.
Total demand for silver grew by 0.4% to 991.8 million ounces in 2019. At the same time investment demand shot up by 12% to 186.1 million ounces. It shows a shift in sentiment which increasingly sees investors viewing silver as a safe haven investment opportunity rather than a simple industrial commodity.
Despite the growing demand, silver mining supply declined for the fourth consecutive year, falling by another 1%, in 2019.
These figures come from the Silver Institute’s ‘World Silver Survey 2020'. The Survey is focused on returns for 2019 and does not therefore reflect any impact from the coronavirus pandemic, which will undoubtedly have magnified many of the trends highlighted.
Silver is generally mined as a by-product from mining for other industrial metals, such as copper and zinc. Its lower price per ounce makes it less profitable to mine, which can make it less of a goal for mining companies.
Silver has a smaller investment bullion market than gold, and instead reflects the industrial market more closely. This means that any change in industrial production can have a great impact on the silver price. More volatile than gold, silver has been described as 'gold on steroids'. For example, during the run on gold from 1970 to 1980, gold rose by 2,328%, whilst silver soared by 3,105%. Again, in the 2008 to 2011 run, gold climbed by 166% and silver by 448%.
During the coronavirus crisis, gold prices have been climbing overall and therefore many investors predict similar but more exaggerated moves from silver. Investment demand has certainly risen significantly since March, with demand regularly outstripping supply for silver coins and bars.
The effects of the pandemic are only escalating in the US, and the comparatively low price of silver may therefore see growing numbers of US investors turning to the popular safe haven. This would further add to current demand, and prices have been rising in the US since March, hitting a four-year Dollar high this week of $19.50 per ounce.
With some mines having to shut down, or reduce production due to the coronavirus, supply will likely fall again this year as well. With investment demand growing and industrial demand returning following shutdowns, the further demand outstrips supply, the more the price for silver will climb.
The Gold-Silver Ratio for the past 20 years.
The gold/silver ratio, seen as an indicator of how ‘undervalued’ silver is, has been falling steadily after reaching an all-time high in March. Currently the gold to silver ratio is holding around 90, bringing it back to pre-pandemic levels, but is still far above the historical average.
Falling mining production, increasing investor demand and a possible post-pandemic industrial recovery could all push the price of silver bullion still higher. With gold forecast to nearly double in value in the next few years, more investors will turn to silver while the price remains low. As the ratio comes down however then silver could see significantly higher gains than gold even.
