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This year’s rise in gold and silver prices followed escalations in the Middle East and growing concerns around the sustainability of China’s heavily indebted property market.
We wrote about the silver price back in June, where we highlighted silver’s outperformance of gold over the previous year. Looking back at the trailing 12-month performance to date, silver prices have retreated recently, as gold continues pushing new highs; gold is now trading around £1,900 and is up 25%, whilst silver trades at £22 and is up 15.5%. (Why are the Stars Aligning for Silver? | The Royal Mint)
Around half of all silver demand comes from its use in industrial applications, with total demand experiencing a decline of 7% in 2023, coming off the back of a record year in 2022. Price-sensitive sectors including physical investment (bars & coins), jewellery, and silverware were the main contributors to last year’s drop. This was in sharp contrast to industrial demand for the metal, which hit another record high, led by the electrical and electronics sector, and solar panel manufacturing specifically. (Silver Demand | (silverinstitute.org)
In 2023, the world deployed 447 gigawatts which was an 87% increase on the year prior and was the most meaningful jump in capacity since 2010, when the global solar market was only 4% of today’s size. (Global Market Outlook For Solar Power 2024 - 2028 - SolarPower Europe).
For context, 447 gigawatts are the same as 447 billion watts, and a gigawatt is said to be enough to power a medium-sized city, with 1.21 gigawatts being the average power of a lightning bolt. (How Much Electricity Does a Lightning Bolt Contain? - Energy Professionals | Leading Energy Advisers)
Total silver demand has far outstripped new supply in the previous three calendar years, with 2024 demand forecast to be more than 20% greater than supply. This supply deficit should, in theory, provide a supportive environment for further price appreciation, however, there are other factors at play. Around 15-20% of annual silver supply comes from recycling, and as the silver price pushes higher, more recycled silver material may come onto the market, tempering any price action.
When looking at the recent moderation in the silver price, one should consider expectations on the demand side of the equation. China and North America are the biggest consumers of the metal, with Germany being the largest European consumer. Debate still swirls around the United States’ ability to avoid a recession, or ‘hard landing’, and as we know, ‘when America sneezes, the world catches a cold.’ China is also dealing with its own transformation, moving from an investment-led to a consumption-led economy, all whilst managing the large debts built up in both the private and public sectors. And, finally, Germany registered an economic contraction in the second quarter of 2024 and teeters on recession.
The ability of governments and central banks to react to changing economic conditions will play a part. Interest rates are being lowered in the Western world, and this provides a better environment for precious metals prices. Silver prices, like gold, tend to have an inverse relationship with interest rates. A higher interest rate environment makes silver (and gold) less attractive, as precious metals do not pay any interest, making them comparatively less appealing when compared to alternative investments such as equities and bonds. As well as being a more volatile metal, silver also tends to lag gold in its price performance, but then, as history shows, it tends to move higher and more quickly in the cycle.
In a recent interview, Michael DiRienzo, executive director of the Silver Institute told CNBC “We think silver will have a terrific year, especially in terms of demand.” However, owing to silver’s wide industrial usage, its performance is tied more closely to global economic developments than gold. Gold, on the other hand, tends to rise in times of uncertainty and crises.
The gold-to-silver price ratio is also trending around the 90 mark, which has shown to be somewhat of a ceiling over the past few years of trading. This ratio is closely followed by precious metals investors and the 30-year average is purported to be closer to 67. The price ratio currently sits around 86, showing the silver price has some way to catch up if the ratio is to tend back towards the long-term average (alternatively, the gold price would need to drop some 20%). (The Case for Silver Investment | The Royal Mint)
In summary, the demand backdrop for silver, and the technical backdrop in its price performance remain solid. However, one must balance this promising outlook with ongoing geo-politics and the evolution of global growth expectations.
The Royal Mint offer a wide variety of silver bullion bars and coins (CGT exempt), which combines quality craftsmanship with world class vaulting arrangements. To learn more, please visit our Silver Bullion page.
Notes
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