Silver mining playbook

While normally silver outperforms gold in a rising gold price environment, it did not happen last year due to lacklustre investment flows from Exchange Traded Funds (ETFs) for both the metals.

"China and India are important silver-consuming countries – and they are both restocking silver. The spot premium for silver in China has risen above US$2 an ounce so far this year, which reflects strong demand."

But changes in the world economy could lead to silver outperforming gold in 2024. What are the factors driving silvers re-emergence?

Demand is up

Aggressive monetary tightening led to the disinvestment of 137 million of ounces in 2022 and 45 million of ounces in 2023 in silver-backed ETF holdings.

But the prospect of the US Federal Reserve starting its easing cycle in the second half of this year and a dramatic rise in gold prices will likely boost investment demand for silver.

Silver ETF holdings rose by 36 million of ounces during March to early April before declining sharply last week, turning net flows marginally negative to 4.3 million of ounces

We believe strong industrial demand and a deficit in the market, along with rising gold prices, will pave the way for further acceleration in ETF purchases through this year and beyond.

Inventories are down

The silver market is structurally undersupplied.

The growing deficit is well reflected in above-ground inventories, with volumes held in the London Bullion Market Association (LBMA) vaults and exchanges dropping sharply in recent years.

After peaking around 1,180 million of ounces in mid-2021, the LBMA holdings fell nearly 27 per cent to 856 million of ounces in December 2023. The drawdowns have accelerated with inventories falling 4 per cent in the first quarter of this year.

The decline in cumulative holdings has been about 248 million of ounces since 2021. A silver squeeze in early 2020-21 saw the ETF holdings of silver surge higher.

Those inflows abated subsequently, but ETFs are still underpinned by a large portion of the LBMA vault holdings. With lower inventories at the LBMA, it will be difficult to meet a surge in inflows in silver ETFs.

Strong industrial demand

Industrial application contributes more than 50 per cent of total silver demand.

Electrical and electronics is the dominant sector, with a demand share of 35 per cent. An upturn in the electronic cycle structurally supports the demand for silver.

The World Semiconductor Trade Statistics forecasts 13 per cent year-on-year growth in 2024 global sales. We estimate silver offtake from the semiconductor sector will increase 12 per cent year-on-year to 430 million of ounces this year.

Solar energy is another emerging segment and a major driver for incremental silver demand. The solar industry consumed about 60 million of ounces in 2010, which was about 5 per cent of the total demand.

The explosion in solar infrastructure lifted this share to 14 per cent in 2023.

Global solar installation may reach 310 gigawatts this year compared to 286 gigawatts in 2023, according to the International Energy Agency. This will increase silver offtake in the solar sector by 8 per cent year on year to 211 million of ounces.

Silver has multiple industrial applications apart from the aforementioned sectors. It is used in electric vehicles, the medical industry and water purification systems.

We estimate silver’s total industrial demand, including the electronics and solar industries, to grow by 8.5 per cent year on year to 626 million of ounces in 2024.

China and India

China and India are important silver-consuming countries – and they are both restocking silver. The spot premium for silver in China has risen above US$2 an ounce so far this year, which reflects strong demand.

We believe imports will continue to be strong because of the accelerating pace of solar installation. Recovering manufacturing activity overall bodes well for silver demand.

The demand for silver is picking up in India as record-high gold prices incentivise gold-plated silver jewellery.

While strong economic growth and building export potential for electronics and solar will boost demand, we believe imports will be supported by strong jewellery, industrial and investment demand this year.

India’s silver imports fell to 3,594 tonnes in 2023 from a record high of 9,450 tonnes in 2022. Since lower imports led to a drawdown in inventories in 2023, this will encourage imports to replenish depleted stocks this year.

In February, imports hit a record monthly high of 2,397 tonnes, bringing total imports above 4,000 tonnes in the first quarter of this year. If this pace of imports continues, imports could potentially exceed 10,000 tonnes in 2024.

Supply lags demand

Strong demand or higher prices do not necessarily lead to increased supply, as silver supply is mostly a by-product of other mining operations. In fact, about 70 per cent of silver comes from lead, zinc, copper and gold projects.

About 56 per cent of the world’s silver production is in the Americas, with Mexico, Peru and Chile supplying 43 per cent last year.

Chile and Peru have faced operational challenges in recent years, which capped the growth in silver supply after the steep decline during the pandemic.

Silver supply from mines is likely to grow as investment in the mining sector returns. An increase in the supply of metals like copper, gold and zinc will support production from silver mines in 2024 and 2025.

Some of the delayed projects are also expected to commission, boosting supply. We estimate production will grow to 867 million ounces in 2024, rising by 3 per cent year on year.

However, this supply growth is insufficient to meet annual demand, which is likely to be around 4-5 per cent.

We estimate the market deficit will widen to 138 million ounces this year, which is 12 per cent of the annual demand. This market deficit will likely drive further withdrawal in inventories, supporting prices.

We expect silver price to move above US$31 an ounce by the end of this year and average above US$27 an ounce in 2024.

Daniel Hynes is Senior Commodity Strategist at ANZ and Soni Kumari is a CAIA Commodity Strategist at ANZ