So everyone is talking about silver right now – intensity and velocity has increased in recent days. Clearly silver is surging on the back of wallstreetbets retail investors looking to repeat their success with GameStop (GME) short squeeze. But to be fair to the fundamental guys, silver started to look interesting in 2020 and started to pick up much more institutional interest on the back of Biden’s election bid and subsequent win (see chart below where positions in silver went from net short in 2019 to net long by 2020). The story stacks up nicely – a precious metal with industrial application providing exposure to electrification, decarbonisation, safe-haven (alternative to gold) & QE. The recent attention from retail punters is likely to bring in speculative funds into the commodity which could see volatility increase.
Silver price movement – wallstreetbets silver chat goes live!
Key points for consideration:
* Fundamentals – potential market deficit. Silver has industrial use (which makes up most of the demand side equation) and the price of which should move around with customers restocking / destocking cycles, mined and production numbers. Mexico is the world’s largest producer and demand approx 1 billion ounces per annum. We could see an improved supply / demand equation for silver on the back of lower mined volumes due to Covid-19 related shutdowns and lower recycling volumes which have been impacted by lower prices. According to data, the global silver market was in deficit in 2019 (physical + ETPs), however excluding ETPs global supply was ahead of demand. We may see the deficit increase if ETPs demand continues to pick up. As per a Bloomberg report, Blackrock’s ETF iShares Silver Trust saw an unprecedented $944m net inflows on Friday 29 Jan-21.
* How do we get to higher silver prices? On the data we have seen, silver futures suggest the market is actually net long silver, so a short squeeze is unlikely to be a catalyst (chart below). Further, the size of the silver market is much larger than say GME for a short squeeze to happen in a similar manner. What will drive silver prices higher = increased demand from electrification / renewables + correlation to higher gold prices (see below – gold-to-silver ratio) / diversification away from gold + market uncertainty (geopolitical + macro risks).
The full extent of the impact from renewables (solar for example) on future silver price remains uncertain, in our view, but could move the needle on the upside. President Biden has a clear target of moving to a green future, with other nations such as China also on a similar path. Specifically on solar panels Biden did put out ambitious targets last year:
(Jul 2020) “Last week, Biden presented a blueprint for renewable energy success from the “Biden-Sanders Unity Task Force” which calls for the installation of 500 million solar panels within five years and the elimination of carbon pollution from power plants by 2035”
* Safe haven status. Much like gold, silver does enjoy the safe haven status and this clearly provides a level of price support as long as Covid-19 lingers on (stop / start of economies) and path of economic recovery not entirely certain. Hence we may see investors gravitate towards silver more than gold due to its industrial use characteristics as well.
* Price movement versus gold. Relative to gold, the metric worth keeping an eye on is the gold-to-silver ratio (shown in the chart below). In 2009, this ratio approached 30x vs current levels of 65x. With the recent rally in silver on the back of wallstreetbets retail investors, this ratio has taken a notable leg down in recent days. This may in fact drive technical / algorithm-driven / momentum focused investors to jump on the back of this rally indiscriminately – above any short covering that may take place. This feedback loop in itself could just drive the price higher.
* Downside risks. Putting aside the speculative activity in the commodity from retail investors, the key downside risks are: (1) the price increases start impacting industrial buyers’ margin which could see them go elsewhere (alternative) or reduce the intensity required (efficiency / innovate); (2) supply catches up with demand on higher prices and easing operating restrictions; (3) industrial demand takes a hit; and (4) lower investor demand for safe-havens drives prices lower (increase in risk appetite).
On face value, the recent surge in silver driven by retail investors appears to have pulled forward much of the future positive news flow – believed to be valued around $30 / ounce. For silver to hit $50 / ounce, we would need to see all of the key price drivers outlined above maintain momentum on a sustained basis. Clearly, the price of silver can very easily spike for non-organic reasons – the price is largely manipulated and extreme activity in the short term could see news of ETFs struggling to keep up with pace, reports of potential shortages could create further ascendancy. On balance, we would sway towards reducing exposure to silver into this price strength (not completely selling out) than adding to positions.