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Will historic silver supply shortage support the price?

05 december 2022

This year has not been good for silver with prices mostly lagging behind in both futures and spot markets. Initially prices reached a yearly peak in March supported by subsiding COVID-19-related restrictions and elevated geopolitical tensions but then dropped significantly in subsequent months. Recently in late November, silver futures were trading at around $21 per troy ounce. A new study by The Silver Institute however indicates that the supply shortage of silver will reach a new high in 2022, while the demand for the metal is also projected to jump this year. Are all these factors (and more) going to be enough to support silver prices?


Silver market 2022 overview

Historically, silver is a precious metal widely used both in jewellery and in industry such as electronics, chemistry, medicine and much more, which is why its prices are affected by economic, financial and political factors. It is also considered a safe-haven asset much like gold, meaning it can hold its value better than speculative assets in times of economic and geopolitical uncertainty.

Throughout 2022, silver market has seen contrasting movements. The precious metal traded up from around $22 per ounce in late January to about $26 per ounce in early March before falling to approximately $18 per ounce in September. It has since rebounded to around $21 per ounce in late November. Overall, silver futures price dropped close to 7% year-on-year.

Early this year, investors' risk aversion amid conflict in Ukraine played a major role in demand for silver among other safe-haven assets. Adding to geopolitical fears was the fact that Russia, being world's #5 producer of silver, would fall under international sanctions, limiting supply of the metal.

In late 2021 and early 2022, post-pandemic industrial demand helped commodity markets like agriculture, energy, precious and base metals reach multi-year highs, although the initial surge did not last for silver. The white metal has underperformed throughout 2022 as investors' interest in the commodity has waned and their focus shifted towards other precious metals like gold and platinum.

Silver and gold prices usually move in tandem, the former tracking the latter. However, since mid-2020 silver relatively lacks momentum, reducing appetite for the metal from professional investors. From July 2020 to November 2022, silver prices fluctuated from approximately $28 per ounce to about $18 per ounce.

In current market conditions, the performance of silver may depend on two fundamental factors: supply and demand, both of which look favorable at the moment. The question is, can they reverse the white metal's underperformance trend?


Demand on the rise

According to the study conducted by the research consultancy Metals Focus and published by The Silver Institute in November, silver demand is forecast to reach a record total this year.

Globally, silver demand is expected to reach a new high of 1.21 billion ounces in 2022. This is 16% more than in 2021. Key sectors for growth include industry, physical investment, jewellery and silverware manufacturing.

Silver demand in industrial applications is projected to increase by 5% year-on-year to the record 539 million ounces driven by the ongoing proliferation of modern technologies. The white metal is used extensively in semiconductor devices, circuits and their components because of its high electrical conductivity even when tarnished. It is essential in such applications as electric cars and photovoltaic solar panels among others. Transition to green energy, investment in 5G infrastructure and consumer electronics are some of the major drivers for silver demand.

However, this factor has a two-facet nature. On the one hand, the current energy crisis may induce a number of governments and manufacturers to accelerate their investments in the green transition, which is also likely to boost silver prices in the next few months. On the other hand, a looming global economic crisis may lead to an investment crunch in the sector, driving silver demand lower.

According to Metals Focus, physical investment in silver is on track to jump by 18% to 329 million ounces in 2022, which would also be a new record. Support has come from buying on price dips and fears of high inflation, geopolitical tensions and global recession.

The rise was boosted further by a surge of Indian demand that recovered from last year's slump, with investors often taking advantage of a weaker rupee before the traditional holiday season when jewellery demand in the country rises significantly. The white metal is often considered a substitute for gold in India for making jewellery and utensils. Silver jewellery and silverware categories worldwide are set to surge by 29% and 72% to 235 million ounces and 73 million ounces respectively.

Image credit: Metals Focus

Exchange-traded silver holdings, on the contrary, are projected to tumble by 110 million ounces due to silver’s higher volatility than gold, which has made it more vulnerable to profit-taking and turned large investors away from the white metal. Metals Focus expects silver prices to drop by 16% year-on-year in 2022, to $21 per ounce on average. However, investment appetite for safe-haven assets during recession or geopolitical uncertainty may still carry over to the silver market to provide support.


Supply shortage

One of the main focuses of the report is the global silver market deficit. Metals Focus projects that it will reach the record 194 million ounces this year, a multi-decade high and four times the level seen in 2021. Last year, silver market deficit amounted to 48 million ounces.

Meanwhile, silver production is expected to rise by 1% year-on-year to 830 million ounces. Output from Mexico will rise most significantly as several major new silver projects that have come online in recent years continue to ramp-up to full production rates. By-product silver production from existing mines and new projects in Chile will also be a major contributor to growth. Partially offsetting these rises will be lower output from major silver producers such as Peru, China, and Russia. Rising inflation, particularly from higher oil and natural gas prices, has put significant upward pressure on costs for miners in 2022.

Фото: Metals Focus

For Russian mining companies, sanctions played a significant role. Polymetal, which is among top 10 silver producers in the world, although not sanctioned itself, faced disruptions to its operations from international sanction pressure. The group had to cease international bullion sales until the end of Q3 2022 with inventory reaching 198 000 ounces of gold and silver. The company expects to fully resume its international sales before the end of 2022. In 2021, Polymetal produced 20.4 million ounces of silver.

Supply shortage has manifested in a decline of stocks of silver held by the London Bullion Market Association (LBMA) and the Comex exchange in New York. Silver inventories in LBMA have fallen for 10 straight months and are now sitting at a new record low of just over 871.3 million ounces. On the Comex, registered silver totals just 38.13 million ounces, a five-year low. In September, the LBMA vaults lost 45.166 million ounces, more than the Comex's entire registered category.

Image credit:


Fed and China fears

Silver prices have come under pressure due to a few major factors, namely the U.S. Federal Reserve hawkish stance on interest rates and a new COVID-19 wave of lockdowns in China.

Central banks combatted inflation by rapidly raising interest rates since the start of the year. Higher interest rates tend to weigh down on precious metals, as investors gain appetite for more risky interest-bearing assets that generate higher returns.

The Fed's pledge to curb inflation is leading investors to believe in further monetary tightening and favor the dollar instead of non-interest-bearing bullion assets. In November, the Fed made its fourth consecutive 75bps interest rate hike, taking its short-term borrowing rate to a target range of 3.75%-4% – the highest level since January 2008 – as it continues on its mission to return the US economy to 2% inflation.

Silver prices have also been undermined by news of rising COVID-19 cases in China, which could lead to renewed lockdowns and negate the small economic rebound the country has seen in the last few months. China is both one of the largest producers and consumers of silver. While mine production may be put under small pressure, the negative impact of lockdowns on jewellery and electronics manufacturing in the country may well outweigh any possible reduction in silver supply. On November 28, the number of daily coronavirus cases in China surpassed 29 000.


Outlook is uncertain

Despite favorable fundamentals, silver market prices may continue to be stuck in a loop of lackluster performance in the near future. Fears of global recession can prop up safe-haven buying but prove to be detrimental for industry demand at the same time. The Fed's rate hikes raise the opportunity cost for precious metals and ongoing dollar strength exerts pressure on silver prices.

The World Bank forecasts the price of silver in 2022 to drop to $21.3 per ounce, which is 15.6% lower than in 2021. In 2023, it is expected to decline even further, to $21.0 per ounce. Metals Focus has a similar forecast with silver prices dropping to $21.0 per ounce in 2022.

"India's restocking is likely to trip over into 2023 but at some point will dissipate," Philip Newman, managing director of Metals Focus, said to Reuters. "By extension, you could see some decent figures in 2023 but it may not match 2022."

Newman said he expected strong demand from industries such as solar panel and auto makers and more silver supply deficits in the coming years, but not as large as in 2022. Silver supply issue may not be as bad as it seems. "You do have still sizeable stocks," Newman said. "I don't think that's a concern."

Theodor Lisovoy for Rough&Polished