Why I’m Watching the ‘Poor Man’s Gold’

Overnight, the US released its awaited consumer price figures for the month of November. They showed that prices had increased 7.1% year-on-year, while core inflation — which excludes food and energy — had increased 6%.

You could almost hear the market’s collective sigh of relief…

These numbers were lower than the expected 7.3% for CPI and 6.1% core inflation, giving hope that inflation is slowing…but also that the US Fed could stop being so aggressive on interest rate hikes. 

The Dow ended the day in the green. The Nasdaq was up just over 1%. The VIX Index — which measures volatility — dropped like a bag of bricks and the US dollar collapsed 1% right after the announcement.

Gold nudged upwards. And, overnight, silver — dubbed the ‘poor man’s gold’ — also rose.

While you may have been hearing plenty recently about the gold rally, silver, one of my favourite metals, has also been making some moves.

Gold and silver prices often move together, and since October, silver is up around 25%.

One reason for it is that the US dollar has been weakening.  

But also…

Silver is a crucial material for the energy transition

Silver is an industrial metal widely used in the economy. But silver is also a great conductor of electricity and will play a big role in the energy transition.

For one, it is a key material in solar panels, with the average panel using around 20 grams of silver.

And while the industry has been trying to decrease the amount of silver used in PV manufacturing, demand for silver in the sector has continued to increase.

In 2021, silver’s use in photovoltaics increased 13% to 113.7 million ounces, making up about 10% of the demand for silver. But BMO Capital Markets estimates that demand could increase to 185 million ounces in the next 10 years.

Silver is also used in manufacturing cars.

In fact, while each internal combustion engine car made needs around 18–34 grams of silver, electric vehicles need more silver as they have more electronic components. They use around 25–50 grams of silver per car.  

So as the number of electric vehicles continues to grow, so could the demand for silver.

According to The Silver Institute, the automotive industry used around 61 million ounces of silver in 2021, but that amount could increase to 88 million ounces by 2025, as you can see below:

And, of course, silver is also needed in everything that goes with electrifying the economy, infrastructure, road charging, etc.

Along with industrial uses, another big driver of silver demand is jewellery and silver investment.

And here, India is a big player. It’s the world’s largest buyer of silver…and the country has been stocking up recently.

This year, India’s demand for silver jumped. Imports could reach a whopping 8,200 tonnes by the end of the year as people are looking to stock up after two years of pandemic and lockdowns.

Just to give you an idea of how big of a jump this is, in 2020, India imported 2,218 tonnes, and in 2021, it was 2,773 tonnes. But even before the pandemic, in 2019, India imported much less than this year at 5,969 tonnes.

So demand for the metal is rising…at a time when supply is looking low.

There are already reports that silver inventories at the COMEX exchange and the London Bullion Market are dropping. 

And the Silver Institute is forecasting that the deficit between supply and demand could hit 194 million ounces this year:

As you can see above, it’s one of the biggest deficits we’ve seen in a while.

Silver versus the Fed

One other thing affecting silver prices has been interest rates.

While silver prices have been increasing recently because of a weakening US dollar, interest rates are still rising, and silver has remained subdued because of it.

We’ll keep an eye on what happens in the next meetings, but one factor that could really unleash silver could be a pivot by the Fed to a less aggressive stance. In particular, as inflation is still high and negative interest rates continue to bite.

So with demand rising and a supply crunch on the horizon, silver is definitely something to keep an eye on.

All the best,

Selva Freigedo,
For Money Morning