Silver's Structural Deficit Suggests Higher Prices Ahead
Summary
- My view of silver is that it will remain in demand and that it should form part of any investment portfolio.
- If you are new to this sector, I would suggest that you acquire some physical silver bars and coins as a top priority.
- As a second priority, look to acquire some of the top quality silver producers as they offer leverage to the underlying commodity of silver.
- Once your investment funds have been allocated, be prepared for a white-knuckle ride and hold on to your position.
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Introduction
The price of gold is now trading at all-time highs of around $2450/Oz; however poor man’s gold, silver trades at around $30.00/Oz which is long way down from its all-time highs of around $50.00/Oz. Given that silver has a store of value use the same as gold and that it also has an industrial use and most of the mined silver is used and not stored I would expect the price of silver to at least keep pace with the price of gold, if not surpass it in percentage terms. In an attempt to understand silver’s behavior I would draw your attention to the recent press release from The Silver Institute which provides a useful insight regarding silver's supply and demand metrics, etc.
The following chart depicts the global supply and demand for silver in 2022 and 2023. In both years, the supply of silver was exceeded by the demand creating a structural deficit in the silver market. This imbalance led to a slight increase in price from $21.73/Oz in 2022 to $23.35 in 2023.
Silver Supply and Demand Deficit (The Silver Institute)
This is not a spectacular increase in price so why the fuss one asks? A clue is in the Silver Institutes Outlook for silver in 2024 where they suggest that supply will decrease by 1 percent and demand is expected to increase by 2 percent to 1.2 Billion ounces, generating a shortfall 215.3 million ounces. So we can glean from this data that demand is once again outstripping supply, which is putting an upward pressure on silver prices, which is good news for those who are invested in this tiny sector of the market.
However, before we get carried away we do need to keep one eye on the Chinese economy as China consumes vast amounts of silver in their industrial sector. Last Monday, July 15th China’s National Bureau of Statistics said the country’s second-quarter GDP rose by 4.7%, which is slower than the 5.3% year on year GDP they registered in the first quarter. This is just one metric and as they say “One swallow does not make a summer” but if the worldwide economy is slowing then maybe the demand for silver could fade a tad.
On the other hand the International Monetary Fund in their July update have stated that “Global growth is projected to be in line with the April 2024 World Economic Outlook (WEO) forecast, at 3.2 percent in 2024 and 3.3 percent in 2025”
On balance I am leaning towards a greener future as the Green Dream does appear to have momentum going forward and therefore silver will need to play its part. However, it is your hard-earned cash that is on the line so it is down to you to do some due diligence and be comfortable with your investment decisions.
The Five-Year Silver Chart
Silver has sprung into life lately so we will take a quick look at the Five-Year chart where we can see that a breakout in 2020 was followed by 4 years of range trading and a correction back to $18.00/Oz. In 2024 however has seen silver blow through overhead resistance to flirt with $33.00/Oz.
The Five Year Chart Of Silvers Progress (Stockcharts)
The RSI was firmly in the overbought zone but has unwound to a mid-range position, so this mini correction may now be over. We now zoom into the one-year time period, as silver has been very active recently.
The One-Year Silver Chart
This chart shows that the technical indicators were in the overbought zone in the middle of May but have now unwound as silver trades sideways. Having gained nearly $10/Oz in just 3 months, a correction has arrived with silver now perched on the 50dma, for now. Pullbacks of this nature are common in a bull market and help to establish a base from which the next rally can be launched.
The One Year Chart of Silvers Progress (Stockcharts)
One of my quirks is the gaps that are formed when things become a tad hectic. One such gap appears on this chart at the $26.00/Oz level, which makes me a bit nervous as silver may spike downwards and backfill it, which would put a dent in investors’ expectations of upwards and onwards in the precious metals sector, so go gently with your acquisitions. Also note the Golden Crossover, which I have shown in the blue square. This occurs when the 50dma crosses the 200dma in an upward motion, and is considered by some chartist to be one of the most powerful technical indicators. Technical indicators such as this one are not always correct, however on this occasion silver prices did rally very well indeed once the cross had been formed. The Golden Cross is one of the indicators that I like to watch, but there are, of course, many technical indicators that can be observed and used as a guide when we are trying to establish the general direction of a commodity or a stock. They do not overrule the fundamental analysis, but if they are both aligned, then one feels a little more confident about making the acquisition.
Conclusion
My view of silver is that it will remain in demand and that it should form part of any investment portfolio.
If you are new to this sector I would suggest that you acquire some physical silver bars and coins as a top priority followed by the acquisition of some of the good quality silver producers.
My readers are aware that I am Long both physical silver and gold and that I own a portfolio of gold, silver and uranium mining stocks in the precious metals space, including but not limited to:
Mega Uranium Limited (OTCPK:MGAFF) [MGA:CA]
Laramide Resources (LMRXF) [LAM:CA]
Wheaton Precious Metals Corp. (WPM)
Agnico Eagle Mines Limited (AEM)
Fortuna Silver Mines Inc (FSM)
First Majestic Silver Corp. (AG)
IMPACT Silver Corp. (IPT:CA)
Pan American Silver Corp. (PAAS)
Your comments are very much appreciated whether you are a Bull or a Bear on the silver market so please send them in and I will do my best to answer them.
Please take very good care of each other as these are treacherous waters that we sail.
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