Industrial Demand in 2024 Will Create a Deficit in the Silver Market

According to a recent report by the Silver Institute, silver prices are expected to remain strong due to a persistent market shortage, which will likely lead to a continued depletion of underground reserves.

On April 17, the Silver Institute published its annual World Silver Survey report, crafted by the British research firm Metals Focus. The report forecasts a significant deficit in the silver market for this year and indicates that this shortfall is expected to persist for the foreseeable future, according to analysts from Metals Focus.

This year, the silver market is projected to experience a shortfall of 215.3 million ounces

Total demand is anticipated to increase by 2 percent, reaching 1,219 million ounces. Despite the modest growth in demand, largely due to weak investment interest, supply is expected to fall significantly short of this figure.

Last year, the silver market experienced a shortfall of 184.3 million ounces, which was 42 million ounces more than Metals Focus had predicted at the year’s end. This marked the third consecutive year of a structural deficit in the market, with this year set to be the fourth. The 2022 shortfall was the largest since the 1990s, the decade when Metals Focus began compiling data on the market.

Ground Reserves are Rapidly Dwindling

In an interview with Kitco News, Phillip Newman, director of Metals Focus, stated that the deficit is increasingly impacting the market as above-ground reserves are rapidly depleting. He explained that in a scenario of persistent deficits, prices must rise; otherwise, the supply of silver to the market could cease, having an affect on the supply curve.

“I think there are significant reserves, but we haven’t yet hit a price where the metal will start flowing into the market,” Newman explained. “And in this environment where prices are going up, people who own silver are not motivated sellers. Even if silver rises to $35 an ounce, would they be on the sell side? I’m not very convinced about that.”

You can read more about how the shortage of silver affects market prices here.

In this environment, investors might experience increased volatility; however, the silver market is well-positioned for long-term stability, bolstered by robust demand, according to Newman.

The exact size of underground silver reserves remains unknown

It is estimated that approximately half of all the silver ever mined, roughly 800,000 tons, is still underground. Currently, reported reserves are confined to various commodity exchanges. Last year, inventories at major commodity exchanges decreased by 5 percent, totaling 1,229.9 million ounces. Furthermore, in 2022, these exchanges saw a significant reduction in stocks, dropping by 23 percent.

Growing Industrial Demand

The deficit in the silver market is primarily driven by industrial demand

Last year, this demand reached 654.4 million ounces, constituting more than half of the total demand. This year, industrial demand is anticipated to rise further, reaching 710.9 million ounces.

“One of the advantages of industrial demand for silver is that the metal has a wide variety of uses. If one of them falls away, the others will remain and take over the market. This is an exciting fact for the silver market,” Newman explained. “Let’s use artificial intelligence as an example. This opens up many different new areas. What are the new uses arising from artificial intelligence?'”

Newman noted that he expects demand from solar panel manufacturers to continue growing. Although the amount of silver used per solar panel is decreasing, the production of solar panels is increasing at a much faster rate.

The Investment Demand Trend is Reversing

Investment demand for silver as a precious metal has significantly weakened, contributing to silver’s underperformance relative to gold in recent years. In 2023, silver investment demand for silver plummeted by 28 percent, dropping to 243.1 million ounces. This year, it is projected to decline further by 13 percent, reaching 212 million ounces.

However, Metals Focus anticipates a reversal of this trend soon. According to Newman, the current gold-to-silver price ratio is high by historical standards, indicating that silver is undervalued compared to gold. At present, one troy ounce of gold is equivalent to the cost of 85 ounces of silver.

“Even after the recent decline, the gold/silver ratio remains high. This will attract investors who believe silver is long-term undervalued, aided by a broader focus on strong fundamentals,”

Metals Focus analysts said in their report

Although investor activity in the silver market has been subdued, Newman notes that the growing deficit is shifting investor sentiment. He added that, according to Metals Focus, this deficit is not expected to resolve in the foreseeable future.

“A new dynamic has emerged on the market, which provides support to the market. “Investors should get used to the idea that deficits are here to stay,” Newman said.

Last year, demand in the silver market reached 1,195 million ounces, while supply stood at 1,010.7 million ounces. This year, the market is expected to face a shortfall of 215.3 million ounces, primarily driven by rising industrial demand. The table below shows the market supply and demand by different areas.

Key Takeaways

The silver market in 2024 is poised to face a significant deficit due to robust industrial demand, setting the stage for continued market volatility but also long-term potential for growth. This deficit, driven primarily by sectors like solar panel manufacturing, is reshaping investor sentiment and market dynamics.

As underground reserves continue to dwindle and supply struggles to meet the escalating demand, the outlook suggests persistent shortfalls. Despite a temporary dip in investment demand, the underlying fundamentals of the silver market remain strong.

Analysts, including those from Metals Focus, anticipate that these dynamics will sustain elevated silver prices and potentially reverse recent trends in investment demand, given the metal’s current undervaluation relative to the high price of gold.

Investors and industry stakeholders should thus brace for a market where deficits become a norm, influencing strategies and expectations moving forward.