Silver Fell from a Supply Surplus to a Shortfall in 2018

The Silver Institute just came out with their supply and demand statistics for 2018.  Global silver demand hit a three-year high in 2018, surpassing one billion ounces after falling just short of one billion ounces in 2017. At the same time, global silver mine production fell for the third straight year, falling 2% to 855 million ounces.  Total supply fell 2.7%, from 1,032.6 million ounces in 2017 to 1,004.3 million ounces in 2018, while demand grew 3.5%, from 998.4 million ounces in 2017 to 1,033.5 million ounces in 2018. 

That means there was a 34.2-million-ounce silver surplus in 2017 (surpluses tend to depress prices), while there was a 29.2-million-ounce shortfall in 2018. (Shortfalls tends to boost prices.)  These shortfalls and surpluses aren’t always reflected in immediate price action, since speculators tend to control the price of the metal on the futures market by bidding the price up or down based on their own future expectations, but supply and demand win out over time, as shrinking supply and rising demand create higher prices.

Although silver is flat so far in 2019, if you go back just one month to November 30, silver is doing slightly better than gold and the Dow Jones Industrial Average and about the same as the S&P 500:

Investment      November 30, 2018            April 26, 2019             5-Month Gains

SILVER               $14.235                                   $15.15                         +6.43%

GOLD                   $1,217                                     $1,286                         +5.67%

S&P 500                2,760                                       2,939                           +6.48%

Dow Jones            25,538                                     26,543                         +3.94%

Silver’s rise from a low of $13.97 last November 14 is a reflection of rising demand and lower supply.

Silver is a “Double Play” Metal – an Industrial Metal and Precious Metal

Silver has always been a “double play” metal, for use in coinage and decoration (such as silverware, jewelry and fine plates) and a rising array of uses in industry, far beyond its original use in traditional photography. Breaking down silver demand by category, more than half of demand comes from industry:

Silver Demand in 2018

Industrial demand                   56.0%

Jewelry                                    20.6%

Coins and bars                         17.5%

Silverware                              5.9%

Source: The Silver Institute

The biggest percentage increase in 2018, by far, came in demand for silver coins and bars, rising 20.5% from 150.4 million ounces in 2017 to 181.2 million ounces in 2018.  This investment demand accounted for the entirety of the growth in total silver demand for the full year last year. This trend is continuing in early 2019.  Last year, in the first three months of 2018, the U.S. Mint sold 5,092,500 1-ounce Silver American Eagles, but in the first three months of 2019, Silver Eagle sales grew by 36% to 6,925,000 ounces. 

Turning to industry, silver has many industrial uses, accounting for more than half of annual demand worldwide in each of the last five years. Basically, when the world is growing, silver demand grows. Silver has the highest conductivity of any element for electricity and heat. It is valuable for soldering or brazing alloys. It’s used for batteries, medicines, nuclear reactors, photovoltaic (solar) cells, dentistry, glass coatings, RFID chips (that track shipments), nuclear reactors, touch screens, water purification, wood preservatives, semiconductors and many other uses – in addition to traditional photography.  Silver’s powerful antibacterial properties also give it several new applications in medical fields.

Silver has this advantage over gold – which has very few industrial applications. That’s why silver acts like “gold on steroids” during a bull market in precious metals. When both metals are rising, silver tends to rise twice as fast as gold. The same is true on the downside, of course, so buyer beware, but with its huge undercurrent of industrial demand, there is a powerful floor under the silver price these days, so I strongly recommend investors buy some Silver Eagles or rounds with the assurance that the supply/demand curve should continue in their favor.