Its performance has dominated that of gold so far this year
SmallCapPower | July 13, 2016: Gold may be the talk of the commodities world in 2016 but its performance thus far has been outshone by silver – up 46% year to date versus gold’s 26% gain. Here are a few reasons why we believe silver is likely to continue its dominance over gold for the foreseeable future.
Compared with gold, the silver market is tiny. According to the Silver Institute, global silver mine production rose just 2% in 2015 to 886.7 million ounces – which would give it a value of less than US$20 billion at the current market price. And, expectations for 2016 are for a fall in global output for the first time since 2011, a 2.4% decline to 784.8 million ounces according to a forecast from CPM Group.
On the demand side, investor purchases of silver coins and bars have surged from 50.7 million ounces in 2006 to 292.3 million ounces in 2015.
As well, India imported a record 228 million ounces of silver bullion in 2015, for use in jewelry, decorative items, and the production of silverware.
It is conceivable that as the price of gold rises the price-sensitive Asian market could increasing turn to silver to give as gifts and for personal storage of wealth.
Unlike gold, silver has the dual distinction of being both an investment as well as an industrial metal. One of the biggest drivers of industrial demand in recent years has come from the solar energy industry.
Silver is an important component of solar cells as it is the best metallic conductor of heat and electricity, with about 2.8 million ounces of silver needed to generate one gigawatt of electrical capacity from solar energy.
China has been the largest consumer of silver for solar energy production, installing 7.1 gigawatts of new photovoltaic capacity in the first quarter of 2016 alone according to the country’s National Energy Association.
This would put China on pace to account for half of 2016’s total projected solar-panel installations globally. Solar-sector silver demand could well exceed 2,600 tonnes in 2016, or about 17% of global industrial requirements. That’s up from 11% in 2011.
All in all, the combination of a small total market size along with increasing demand and falling global production makes silver the most volatile of the precious metals in terms of price. Perhaps the biggest unknown, however, that could hold the silver price back is the scrap market, the supply of which tends to rise along with the commodity’s underlying price.
If its recent historical moves are any indication of future price appreciation, though, then silver investors could be in for a real treat. From 2008 to 2011, the precious metal’s price soared more than five-fold from about US$9 an ounce to approximately $49. Even a move back to $49 this time around would represent 149% increase. For the gold price to rise by the same percentage it would have to surpass US$3300 an ounce.
