Gold News

What's Up with Silver?

Not the silver price, that's for sure...
SILVER PRICES can't get a break, writes Adrian Ash at BullionVault. Not even with physical-product demand at all-time record highs.
Gold, for instance, just dropped for the 4th month running, down to the cheapest in 16 months on a month-average basis.
But that's only true versus the almighty US Dollar. Whereas silver has no such excuse.
Gold for both Euro and UK Pound investors, fell only to a 5-month low. And while July's month-average price in Dollars was 11.8% below its all-time record high, it came just 4.6% below the (more recent) peak in Euros and only 3.4% lower in Sterling.
Silver prices in contrast just hit the lowest month-average since June 2020 in US Dollar terms, and also 2-year lows in Sterling and Euro terms too.
Gold priced in US Dollars, Sterling and Euros, rebased to 100 = Jan 2019. Source: BullionVault
Silver has also retreated harder than gold from its recent peaks against the bullion market's major currencies.
July's month-average price was more than 30% below May 2021 in Dollar terms. It was also 22.4% below August 2020 in British Pounds, and 18.2% below March 2022's all-time monthly peak in Euros.
The strength of the almighty Dollar, in other words, has been masking some resilience in gold. But it doesn't explain the plunge in silver prices.
So what's up with silver?
You might think falling prices signal that no one wants the 'indispensable element' (as the Silver Institute of US miners and dealers has called it). 
But no, not quite. 
London's bullion vaults are where large bars of precious metal pile up when no one wants to buy them for turning into other stuff...
...such as jewellery or bonding wire, coins or small bars, watch cases for luxury Swiss time-pieces, chandi varq for wrapping sweets, or cruet sets for your salt and pepper.
For gold, this means UK vault holdings tend to swell when the precious metal finds favour with large investment flows...first because those big investors like to hold gold in London, ready for sale in the heart of the global market, and second because those inflows tend to drive up prices, denting jewellery demand as well as coin and small-bar manufacturing worldwide.
Silver, in contrast, finds more than half its annual end-user demand from industry and technology. (Gold finds less than 10% from 'productive' use.) So silver tends to pile up in London when industrial demand is weak, as well as small-bar and coin demand, growing loco-London stockpiles because the metal has no place better to go.
This is NOT what has been happening so far in 2022.
Instead, the price drop in silver has come as demand has jumped.
Chart of London silver vault holdings and UK silver exports. Source: Metals Focus
London's bullion vaults now hold 1.1% less gold than they did at last summer's record peak.
Silver holdings in London, in contrast, have shrunk by 15.5% over the last 12 months, plunging to the smallest since late-2016.
What's up?
Record global silver demand, that's what.
"One of the key reasons for the decline in [London] silver stocks has been the recovery in the Indian market," says specialist consultancy Metals Focus.
"Our research suggests that this could signal a revival in India's investment demand, which has been subdued over the last two years...[after] the pandemic had a pronounced impact [by] pushing the economy into recession for the first time in four decades.
"Another reason for the decline in London stocks relates to the strength of silver industrial demand. This may surprise, given ongoing supply disruptions, the chip shortage and also the recent weakness in consumer electronics (reflected in weaker mobile phone and PC sales).
"However, vehicle production has risen, albeit modestly given the above challenges. [Notably] for silver demand, the metal benefits from the transition from the internal combustion engine, through to hybrids and finally electric vehicles, as each technology consumes more silver.
"Another important driver of silver fabrication has been the strength of the photovoltaics (PV) market. Despite ongoing efforts to reduce silver loadings, this is being comfortably offset by the increase in new [solar energy] capacity, which reflects the growing number of countries that are now active in this space."
Chart of annual fabricated silver product demand. Source: Metals Focus
So silver is seeing record demand for fabricated product, as Metals Focus managing director Philip Newman explained on our recent webinar for the LBMA.
Hence the steep drop in London vault holdings. Hence the steep drop in silver prices.
Erm, say what?
One guess for how-in-heaven's-name silver prices are falling amid record high end-user demand might be that falling prices have provoked that demand.
Consumers, after all, prefer to buy things cheap. So too do industrial users.
But whether it's chicken-and-egg versus horse-before-the-cart in the precious metals market today, silver isn't alone in confusing analysts, investors, business managers and traders right now.
Tweet from a confused economist on Monday morning
Wheat is joined by US gasoline prices, shipping costs and most other commodities in confounding common sense this summer.
Copper prices, for instance, have now slumped by 1/3rd from March's fresh all-time high in US Dollar terms...
...plunging last month to the cheapest since November 2020, back when the global Covid Catastrophe had shut many factories and building projects the world over.
"Global reported refined copper demand in 2021 was 24.40 million tonnes," says the latest data from the International Wrought Copper Council, "up 5.0% on that for 2020.
"For 2022, the forecasts suggest that refined copper demand might be 24.725 million tonnes, up 1.3%."
Yet here we are, with copper prices slumping.
"At the beginning of the year we forecast a fairly balanced market," says the base metals analysis team at StoneX, "driven by improving production on the back of new projects and a halving in demand growth from 2021 levels driven by the wider pullback in manufacturing activity, stimulus and the weak Chinese property sector.
"However, given the developments of this year so far, we are now forecasting a deficit market for copper, just above 200,000 tonnes. [And] the key driver for the change in our outlook has arisen on the supply side.
"We have had to reduce our expectation for growth from mine production, given not only the social and political unrest that has occurred within both Chile and Peru (which accounts for two-thirds of global mine output) but also driven by ongoing drought in Chile, which is resulting in companies looking to build desalination plants, particularly as environmental restrictions and awareness lifts."
Long story short, copper's supply-demand balance is tight and tightening.
Yet prices are down to late 2020 levels in US Dollar terms and early-2021 levels in Euros too.
Chart of global silver market supply/demand balance. Source: Metals Focus
As for silver, and reviewing the balance of silver supply against demand, Metals Focus now see "a new phase" for silver of "uninterrupted deficits [set to] persist beyond 2022."
But fact is, those deficits will find plenty of above-ground supplies to draw down from.
"Identifiable bullion stocks," says precious-metals expert Rhona O'Connell at brokerage StoneX, pointing to data collated by Metals Focus for London vaults, plus US Comex warehouses, and China's best available figures, "amounted at the end of 2021 to the equivalent of two years' industrial demand for silver."
Pushing harder and directly against silver prices meantime, the hot money of hedge funds and other leveraged speculators is now betting that silver prices are going down.
Net of that group's bullish bets on Comex silver contracts, the 'Managed Money' category hasn't been bearish like this since mid-2019.
Maybe they're right? Maybe the indispensable metal will continue to fall in price, dropping from what were the lowest levels in 2 years last months...
...and falling despite record-heavy end-user demand and persistent supply shortfalls in the years ahead?
Chart of Managed Money category of Comex traders' net betting on silver prices. Source: BullionVault
Or maybe the hot money is wrong?
History says it tends to be most bearish silver (or least bullish) when silver is making a significant low.
But if the tail of derivatives can wag the dog of physical prices short term, then history also says that hedge funds and other leveraged speculators could get very much more bearish yet.
One other thing which Metals Focus rightly notes is happening in London stockpiles is the decline in silver-backed ETP holdings.
Market leader the iShares SLV trust fund has now shrunk by almost 30% from its record size of February 2021, contrasting with the strong global demand for coins and small bars (especially in the US, where record-high premiums above spot bullion prices for little chunks of silver have basically sold themselves to retail customers eager to believe there's a shortage of metal).
Big-bar investment demand, in other words, is weak, as is leveraged speculation. Small-bar and coin demand is strong on the other hand, along with silver's other consumer-demand and industrial segments.
Chicken or egg, cart before horse?
Either way, silver bullion prices are lagging badly behind gold, and they're holding near the cheapest in 2 years in cash terms for US, Euro and UK investors. Even as fabricated product demand hits a new record, leading to an extended period of supply/demand deficits ahead.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals