Record industrial demand will continue to dominate the silver market and will be the most significant factor behind the precious metal’s third straight annual deficit, according to the latest update from Metals Focus on behalf of the Silver Institute.
While industrial demand is expected to hit record highs this year, total global physical demand is expected to ease slightly to 1.14 billion ounces, down 10% from the record set in 2022.
“Gains in industrial applications will be offset by losses in all other key segments,” the analysts at Metals Focus said in their updated research. “Despite the fall, total demand remains elevated by historical standards, making the 2023 figure the second highest in Metals Focus’ data series.”
The silver market’s strongest pillar is expected to grow by 8% to a record 632 million ounces this year.
“Key drivers behind this performance include investment in photovoltaics, power grid and 5G networks, growth in consumer electronics, and rising vehicle output,” the analysts said.
Despite record amounts of silver flowing into industrial applications, investor demand remains a critical missing piece of the market.
Metals Focus noted that physical demand from the investment sector is expected to fall 21% to 263 million ounces, representing a three-year low.
“While most markets have seen weaker volumes, losses have been concentrated in India and Germany,” the analysts said. “In India, record-high local prices both deterred new investor purchases and led to profit-taking, resulting in a 46% decline. In Germany, investor sentiment was hit hard by the VAT hike to some silver coins at the start of 2023.”
Silver-backed exchange-traded funds (ETFs) also continue to weigh on investment demand. Metals Focus said that this segment of the market is expected to see its second straight year of net outflows.
“As was the case in 2022, the bulk of year-to-date redemptions reflect continued monetary tightening and its consequential boost to yields, especially in real terms. However, the decline in holdings is expected to be more restrained at 40 Moz in 2023, roughly a third of 2022’s record outflows,” the analysts said.
While investment demand remains the weakest link in the market, Metals Focus said it still expects to see a significant deficit for the year, though down from last year’s record.
“At 140 Moz, this will be 45% lower than 2022’s all-time high, but this is still elevated by historical standards,” the analysts said. “Just as important, Metals Focus believes the deficit will persist in the silver market for the foreseeable future.”
Metals Focus expects that long-term deficits in the silver market will continue to support a long-term uptrend, even if they believe that this year’s rally has reached its limit.
The British precious metals research firm said it sees silver prices increasing 6% this year, rising to an average price of $23.10 an ounce. Through Nov. 7, prices have rallied 8%. December silver futures last traded at $23.93 an ounce, up 1.67% on the day.
Metals Focus is not the only firm looking for silver prices to rise over the long term. Many analysts have noted that silver is relatively undervalued compared to gold and is in an excellent position to outperform as the Federal Reserve starts to ease interest rates next year.
In a recent interview with Kitco News, Phillips Baker, CEO of Hecla Mining and chair of the Silver Institute, said that silver prices have to go higher to bring more supply onto the market in order to meet demand forecasts.
“You’re not going to go and melt grandmother’s silver tea service at $35 an ounce,” he said in the interview.
Looking at silver supply, Metals Focus sees mine production falling 2% to 820 million ounces in 2023, driven by lower output from operations in Mexico and Peru. At the same time, recycled silver is expected to grow 1% to 181 million ounces.
Source: Kitco
