5 Key Takeaways of the Silver Market in 2017
If you ask me,
‘Ian, if you like to start investing in precious metals today, which of the two would you consider buying first? Is it gold or silver?’
My answer is silver.
Why? Is it because it is cheaper than gold? Yes. But, it is not the main reason. Personally, I’ve learnt that silver has better investment qualities than gold today. Similar to gold, the investment potential of silver is assessed based on understanding the relationship between demand, supply and its prices.
Thus, a good time to buy silver is when:
- Demand for silver is high & sustainable.
- Demand exceeds supply.
- Prices of silver are depressed.
Meanwhile, a good time to sell is when:
- Demand for silver is low.
- Supply exceeds demand.
- Prices of silver are overvalued.
Personally, I use data and information collected from the Silver Institute to guide my decision. It is where you are able to download the World Silver Survey, an annual publication that summarizes the global silver market. In this article, I would offer 5 key takeaways that you need to know about silver before you start investing in it.
#1: 10-Year Physical Silver Deficits amounts to 1,170 Moz
From 2007 to 2016, global silver demand has exceeded global silver supply by 1,169.7 Million ounces (Moz). This is due to substantial rise in investment demand for silver and its usage in the photovoltaic industry. As such, they have outpaced growth in silver mine productions over the last 10 years.
Source: World Silver Survey 2017
#2: Investment Demand Switches from Paper to Physical Bullion
Overall, investors worldwide had added 2,507.6 Moz of silver into their investment portfolio over the last 10 years. Upon further readings, I’ve discovered that the silver investment market can be splitted into two halves with five years on each half. For instance,
From 2007 to 2011, the average silver price has increased from US$ 13.38 an ounce to US$ 35.12 an ounce. Total investment demand for silver was 1,129.6 Moz. Here’s the breakdown:
- Physical Bullion (Coin & Medals) amounted to 707.2 Moz (62.6%)
- Paper (Exchange-Traded Products) amounted to 422.4 Moz (37.4%)
From 2012 to 2016, the average silver price has dropped from US$ 31.15 an ounce to US$ 17.14 an ounce. Total investment demand for silver was 1,378.0 Moz. Here’s the breakdown:
- Physical Bullion (Coin & Medals) amounted to 1.131.3 Moz (82.1%)
- Paper (Exchange-Traded Products) amounted to 246.7 Moz (17.9%)
Why is this significant?
This is because:
- Speculation & short-term trading activities slowed down from 2012 to 2016 as silver prices dropped significantly during the period. In most cases, these group of people would ‘chase’ for anything that goes up in prices without assessing its fundamentals. They became easily bored if an asset drops in prices and becomes cheap.
- Meanwhile, long-term investors entered the market and increased their position in silver to capitalize on lower prices. This group is a different breed of people from speculators & short-term traders as described above. This is because they are hunting for investments that are both good and cheap.
Source: World Silver Survey 2017
#3: Above-Ground Silver Stocks amount to 2,590.9 Moz
From 2007 to 2016, the identifiable above-ground silver bullion stocks (Silver Stock) had increased from 1,293.4 Moz to 2,590.9 Moz.
If we take a look closely at the 2,590.9 Moz silver stock available, I’ve learnt that 1,571.2 Moz or 60.6% of total silver stocks are kept safely in custodian vaults, an increase from 736.5 Moz in 2007.
The increase in silver stockpiles in custodian vaults is attributed to higher silver investment demand during the 10-year period. This is especially from Asian investors due to rising affluence levels across populations in Asia. Personally, I submit to you that a lion share of these silver stockpiles are owned by private investors who intend to keep silver over the long-term.
Source: World Silver Supply 2017
#4: Silver Demand in Photovoltaic Expects to Rise Above 100.0 Moz
Over the next 5 years, the amount of installed capacity of photovoltaic (PV) panels will grow at a rate of 23% per annum, reaching 644 GW by 2020. This is due to a gradual shift from coal, oil and gas to renewables as a source of energy as nations such as China and India are attempting to control pollution and carbon emissions.
As such, demand for silver from the PV industry is expected to rise as silver plays a vital role in the production of solar cells that produce electricity. Based on findings of CRU Consulting, a London-based Global Commodities Research & Consultancy firm, silver demand for PV is forecasted to be above 100 Moz per annum from 2017 to 2021.
Source: CRU Consulting
Source: CRU Consulting
#5: Silver is Trading Below 74% of its Intrinsic Value
In my previous article, I wrote that the intrinsic value of one gold coin is equivalent to twenty silver coins. This is based on the initial weightages used for the establishment of the US Dollar at the start of the 20th century.
As of 27 September 2017, gold is trading at US$ 1,286.47 an ounce. Thus, the intrinsic value of silver would be US$ 64.32 an ounce. Today, silver is trading at US$ 16.81 an ounce. As such, it is 74% lower than its intrinsic value of US$ 64.75 an ounce. Thus, at current prices, silver is not only more affordable but also cheaper than gold,
So, what’s the verdict?
- Investment demand has driven global demand of silver over the last 10 years. Physical silver bullion remains popular, especially in Asia, despite emergence of exchange-traded products (ETPs) in the silver market.
- Demand has exceeded supply. Most above-ground silver stockpiles are held by long-term investors and not industrial players. In 2016, 561.9 Moz of silver was consumed for industrial purposes. With only 15.7 Moz held in stockpiles, industry players today are heavily reliant on mine productions to supply silver for their industrial needs.
- Silver price remained depressed as it is trading below US$ 20 an ounce. It is also undervalued by 74% calculated based on the Gold / Silver Ratio of 20:1.
Co-Founder of Goldsilvermethod.com
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