Precious metals are back on investors’ radar as inflation inches higher in the world’s major economies and central banks drag their feet to raise interest rates due to the fear of killing the rally in risky assets like the equities and real estate.
Last week, the consumer price inflation in the United States for October 2021 came in at 6.2 percent, the highest since December 1990. Immediately, there was a sell-off in risky assets such as equity and there was a rally in precious metals including gold and silver as investors rushed to hedge their portfolio from inflation.
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Currently, most of the attention is going to gold given its relatively better price performance in the last few years. But here are three reasons why we feel that silver has the potential to do even better than the yellow metal in future if inflation remains high and persistent.
1. Silver is one of the cheapest metals right now. Last week gold touched a five-month high but silver is still down nearly 20 percent from its August 2020 highs. In contrast, gold is only around 10 percent below the lifetime high it hit in August last year. Similarly, other industrial metals such as steel, copper and aluminium made fresh lifetime high and continue to show strength.
In contrast, silver remains one of the cheapest metals on an industrial basis. At its current internal price of around US$25 to an ounce, it is nearly half of its record high price of $49/oz made in April 2011.
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This makes silver truly a dark horse in precious metal space.
2. Rising industrial demand for silver. Historically, photography was the biggest user industry for silver but this is now being replaced by photovoltaic and electronics. Silver is a key component of solar cells that convert sunlight into electricity. According to the Silver Institute, the usage in solar photovoltaic has nearly doubled in the last decade and this will increase as major economies expand solar power capacity in a bid to achieve their emission target towards the net-zero goal.
Computers and mobile phones are other big consumers of silver. Many key connectors in electronic devices use silver as it is one the best conductors of electricity. The growing demand for solar and electronics is still not being felt in the silver market because of the historically high usage of white metal in photography.
At its peak in the early 1990s photography accounted for nearly half of all industrial demand for silver and more than a quarter of all silver demand. However, in the last two decades, silver usage in the photography industry is down by nearly 90 percent. This has been one of the key reasons for the poor performance of silver compared to most other precious and industrial metals.
For example, in 2021 the photovoltaic industry consumed 105 million ounces of silver, nearly twice the consumption in 2012 and more than four times the silver demand from the photography industry.
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3. Stagnant silver production. While the industrial demand for silver is expected to grow faster due to de-carbonisation, the organic supply of silver is stagnant and even declined in a few years due to a lack of new mining. The mine production of silver is down 6 percent in the last five years from around 900 million ounces in 2016 to an estimated 848.5 million ounces in 2021, according to data from the Silver Institute.
In comparison, the total demand for silver including investment demand is up 4 percent in the last 5 years, leading to demand outstripping supply. Many silver analysts expect a real shortage of physical silver in the market if the investor sentiment around metal turns bullish.
For Indian investors, silver has the added advantage of being cheaper and easier to buy and store than gold. A fair quantity of silver can be stored at home, unlike gold that is mostly stored in bank lockers. Besides, there are few ownership restrictions on silver in India, unlike gold. This makes white metal an attractive investment opportunity for investors in India.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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