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Can the Silver Price Shrug Off
Emerging Industrial Headwinds?

Recently, the IMF lowered its 2018 and 2019 global economic growth forecast, citing the US/China trade war as a key reason. Prior to this, industrial metal prices had already faced downward pressure, as investors considered the implications of the trade war. On the one hand, this related to direct implications on different industries. On the other, it concerned a possible slowdown in economic growth, and by implication, industrial production growth, which is in line with the IMF’s new projections, notes Charles de Meester, founding partner of Metals Focus.

Interestingly, investors had appeared to shrug off some of these fears, which was reflected in the strength of US equities and the rebound seen across some industrial commodities. This in turn helped to lift silver, both in absolute terms and relative to gold, resulting in the gold:silver ratio falling to 81:1 in early October, its lowest since 28th August. Following the IMF’s latest forecast, one question that now arises is whether silver will again be hit by these industrial headwinds, suffering further attrition, in the process remaining the weakest performer among the major precious metals, a position it currently holds this year?

Although silver’s industrial credentials have weighed on its price recently, it is worth noting how important industrial demand is for silver. While we forecast a slight 0.2% rise to 514Mz (15,994t) in 2018, this will be the highest total this decade. It will also be the fourth year of uninterrupted growth. In terms of overall supply/demand, industrial offtake now accounts for 54% of the global total (vs. 50% in 2010). In spite of efforts to thrift on silver usage (or achieve entirely silver-free solutions), industrial demand remains a success story in the market.

Regarding the direct impact of the trade war on silver consuming industries, in most cases we believe that, at least at a global level, this will be limited. A globalised supply chain should allow many manufacturers to shift sourcing and production across different geographies. Naturally, there will be winners and losers, but the industry as a whole should be able to adapt to the new regime. For example, much has been made of the tariff impact on the photovoltaic (PV) market including those introduced in the US and India. Without diminishing their importance, we should not lose sight of the fact that silver PV demand remains historically high, and this is also against the backdrop of additional headwinds from reduced subsidies. To put this into perspective, this year we forecast PV silver demand of around 94Moz (2,900t). Back in 2005, it consumed just 7Moz (225t).

The secondary effect of rising tariffs, in other words through their impact on growth and industrial production, is a more pressing concern. If demand for the myriad of end-products using silver falters, there is no doubt that silver industrial fabrication will mirror this trend and even overshoot it, given thrifting and substitution pressures.

Meanwhile, although industrial offtake has been strong, other demand segments have struggled, resulting in significant market surpluses, that have also weighed on the silver price. Chief among these is physical investment, that has been falling in recent years. This is discussed in our Investment Focus 2018/2019 report, which will be launched in London on 17th October, but for now the key point is the scale of the drop. Against a 2015 high of 309Moz (9,610t), our 2018 forecast sees it having almost halved, to 156Moz (4,860t). On the supply side, even though 2017 saw a marked 6% drop, this appears to have been a one-off. We forecast a slight rise in 2018 and a sharper 3% lift for 2019.

Overall, therefore, we have estimated another substantial market surplus of 48Moz (1,500t) in 2018 marking the third successive surplus of this order of magnitude. As a result, between 2016-18, global above-ground bullion stocks of silver will have risen by roughly 150Moz (4,700t); we also forecast a sizeable market surplus for silver in 2019, which appears on course to comfortably eclipse last year’s total. If the impact of the trade war on the global economy also derails silver industrial demand, this will see even larger additions to above-ground inventories in the near future, further weighing on the price.

The silver price may also have to contend with pressure on base metal prices, caused by the possible slowing of global industrial production. To put this into some perspective, mid-2018 marked a near two-year high for copper and the highest lead price since July 2011. However, the escalating trade war has resulted in growing bearish sentiment towards both metals.

Source: Charles De Meester writing in Precious Metals Weekly, a newsletter published by Metals Focus,, one of the world’s leading precious metals consultancies.

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