Over the years, plenty of investors and analysts have claimed silver is in a supply deficit, and while that may have technically been true on some level, a report released this week by StoneX claims the white metal will move into a deficit this year and could provide a floor for prices.
StoneX Head of Market Analysis in Europe and Asia Rhona O’Connell explained, “Although it is generally accepted that silver is a metal in deficit, we need to define ‘deficit’ more closely. Taking the Metals Focus numbers for the recent past, for example, shows that the market has indeed been running a deficit, but this is after including OTC investment activity.”
O’Connell said if that activity is removed, silver has been posting surpluses, but said that supply has been declining and StoneX projections show the metal will move into an actual deficit on that basis before the end of this year.
“And (it will) expand thereafter,” O’Connell said.
In recessions, silver acts different
O’Connell’s research showed that silver often diverges from gold during recessions and instead follows its less-valuable cousin, copper. Silver, in general, is not directly mined for and is produced as a byproduct of copper.
Shown is the performance of gold (red), silver (gray) and copper (brown) during the 2008-2009 recession. (Source: StoneX)
“We have often noted that when gold is meandering in no particular direction, silver turns its attention to copper — both in terms of price action and, to a lesser extent, correlations,” she said. “The same thing happens in a recession as the outlook for demand takes center stage, given that the primary (and therefore price-elastic) supply of silver is typically below 30% of total.”
A report from Heraeus released Monday suggested a similar phenomenon in today’s market environment.
It predicted that a continued lack of copper production directly affects its by-product silver, which could benefit from higher prices due to the restricted output.
“By-product silver supply could be constrained and other areas of silver supply are suffering, too,” the report reads. “Peru’s silver production has been in steady decline since 2017, mainly as a result of the closure of primary silver mines.”
In 2017, Peru produced 139 million ounces of silver, compared to just 98 million last year.
Meanwhile, Blue Line futures Chief Market Strategist Phil Streible said on Monday, “If we continue to see deterioration in the copper market overnight, you should see silver prices track lower with it. China wants to boost the property sector, which goes into commodity consumption of concrete and steel, and that’s closely correlated to copper, aluminum and silver.”
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