Silver outlook positive as industrial demand remains strong

Silver has been one of the best-performing metals in April and it looks set to continue trading higher in the medium term as the market remains in deficit.

Prices have rallied from around $20 an ounce at the start of March to just above $26/oz at the start of May, although they have pulled back slightly since then.

Though technically traded as a precious metal, half of the total demand for silver comes from industrial users, in particular from photovoltaic solar panels, lithium batteries, cars, and 5G networks. The remaining demand for silver is split mostly between investment buying of physical silver, jewellery, and to a lesser extent, silverware.

This means that the prices can be affected by economic data such as GDP numbers and industrial production, but also the strength of the dollar, interest rates and what is happening in the equities market.

“We are constructive on precious metals going into May as we suspect that a weaker dollar and a relatively range-bound band in US interest rates will propel both gold and silver higher still,” said Marex analyst Edward Meir. However, he warns that the instability in the US banking system is far from resolved and that it will continue to present a threat to the markets.

“The Fed issued an 80-page autopsy report on the recent events that transpired in March, but other than blaming bank management and local regulators (who seem to have lost the forest for the trees in terms of supervision), no new ideas emerged,” Meir added. “More importantly, there was nothing in the report that would immediately prevent other banks from encountering the same issues. The potential for a further bank collapse will continue to infuse volatility in the markets which means that while the overall outlook for silver may be good; this could pose a potential short-term threat.”

China’s economic growth and industrial production will also play a key role in silver prices. Although industrial production in China, first-quarter GDP and retail sales have all recently shown better readings than in 2022, these numbers present a rise from a fairly low-level last year.

So while there is growth in China’s markets, it is not as strong as market watchers would have liked.

On the upside, new Chinese bank lending hit an all-time high in the first quarter, although this could simply be because of front-load lending early in the year when banks try and secure a larger loan allocation from the government.

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The bigger picture

Industrial demand for silver bounced back last year boosting sales to a record high of 1.242 billion ounces. The biggest increase in demand came from the jewellery segment and physical silver investment (up 22% and 29%, respectively), with the industrial segment rising 5% last year.

However, mine production levels have eroded during Covid and global output is still lagging behind demand, resulting in a 237.7 million-ounce deficit, according to the Silver Institute.

“Led by end-users in the green economy, industrial demand is forecast to rise yet again, by 4% to a new record high this year,” the Institute said.

In its latest report, the Institute noted that the market is moving into an ongoing deficit, although this deficit could still be at least partially filled by metal held by individuals and investors.

Here’s a selection of silver ETFs