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SprottDeep research26 May 2022Source: sprott.com

Silver Demand and Supply Trends to Watch

Sprott is a Toronto-headquartered asset manager specializing in precious metals and critical materials (NYSE/TSX: SII), tracing its roots to Sprott Securities founded by Eric Sprott in 1981 and now led by CEO Whitney George. It runs physical gold, silver and uranium trusts, ETFs, active strategies and resource lending, with about $65bn in AUM. The Insights column carries monthly commentaries and white papers on uranium, gold, silver, copper and critical materials by Paul Wong, Jacob White and John Hathaway (ex-Tocqueville gold manager) — note the house's structurally bullish commodity stance, as it sells the corresponding trusts and ETFs.

Eric Sprott、Whitney George · 1981 · 加拿大多伦多Precious metals & critical materials

In plain words

This report explains why silver prices have been flat recently but could be a good long-term bet. Short-term, rising interest rates and risk aversion are hurting silver more than gold. But long-term, silver has strong industrial demand—especially from solar panels and electric vehicles—while mine supply is shrinking, creating a supply gap. For regular investors, this means silver might be undervalued. If the macro environment shifts, silver could outperform gold. Worth reading because it uses data to show the supply-demand imbalance and why the long-term outlook is bullish.

AI SummaryAI-generated · may contain errors · verify against the original

Sprott Report Explores Reasons for Silver's Recent Underperformance and Future Outlook The core argument is that silver possesses both industrial and monetary attributes, and the current macroeconomic environment (e.g., rising interest rates) poses short-term headwinds for precious metals, though th

~6 min full read · 10 sections
Deep Analysis

Theme and Background

This chapter focuses on the reasons behind silver's recent lackluster price performance and analyzes its long-term supply-demand fundamentals. The report points out that the current macro environment (rising interest rates, declining risk appetite) poses short-term headwinds for precious metals, but silver's industrial demand (especially from the green energy transition) and supply constraints will dominate the long-term trend.

Core Views

The author holds a long-term bullish stance on silver but believes short-term prices are suppressed by macro factors. The core judgment is:

  • Silver's "dual pricing function" (industrial attributes + monetary attributes) makes it more volatile than gold, and current macro headwinds may reverse.
  • Counterintuitive judgment: Despite silver's YTD decline of 7.02%, the author argues that its fundamentals (supply deficit, green demand) are stronger than price performance suggests, and long-term supply constraints will outweigh short-term macro pressures.

Key Arguments and Data

1. Price Performance Comparison (YTD 2022 as of May 23):

Asset Change
Silver -7.02% (from $23.35 to $21.72)
Gold +1.38%
S&P 500 -16.65%

2. Supply-Side Constraints:

  • Mine production grew only 5% in 2021, below the expected 8%.
  • A 72 million ounce supply deficit is expected in 2022.
  • Ore grades have declined by approximately 55% since 2005.
  • Global silver reserves fell 4% in 2021 to 3.412 billion ounces (122 million ounces added, 270 million ounces consumed through mining).
  • Global silver exploration and M&A activity was sluggish in 2021, with only 8 transactions totaling $11 million.

3. Demand-Side Support:

  • Silver demand from photovoltaics (solar energy) grew 13% in 2021, hitting a record high.
  • Industrial demand accounts for approximately 50% of total silver demand, with photovoltaics representing 20% of industrial demand and its share continuing to grow.
  • Silver demand from electric vehicles is expected to surpass that from photovoltaics in the future.
  • The correlation coefficient between silver prices and energy transition ETFs is as high as R²=0.82.

4. By-Product Risk:

  • Over 70% of silver supply comes from by-product mining of metals such as lead, zinc, and copper.
  • If a weakening macro environment leads to lower by-product prices, silver supply will face additional pressure.

Companies/Assets Involved

  • Silver Spot: Core analysis target, down 7.02% YTD to $21.72.
  • Gold Spot: Benchmark for comparison, up 1.38% YTD.
  • S&P 500: As a risk asset comparison, down 16.65% YTD.
  • Energy Transition ETFs (portfolio of 12 ETFs): Highly correlated with silver prices (R²=0.82), covering solar, renewable energy, wind, uranium, etc.
  • By-Product Metals: Copper and zinc futures price trends affect silver mining activity.

Investment Implications

  • Long-term bullish on silver: The supply deficit (72 million ounces), declining ore grades, and growing green demand (photovoltaics + electric vehicles) form a structural bullish thesis.
  • Short-term caution: Rising interest rates and declining risk appetite are headwinds, but if the macro environment shifts (e.g., Fed policy easing), silver's elasticity will be greater than gold's.
  • Monitor by-product prices: If copper and zinc prices fall, it will exacerbate silver supply contraction, thereby reinforcing the long-term bullish thesis.
  • Energy transition theme linkage: Silver can serve as a "physical vehicle" for green energy investments, offering hedging or enhanced allocation with related ETFs.

Theme and Background

This chapter focuses on the industrial demand for silver, particularly the reshaping effect of the Energy Transition on its long-term demand structure. The author argues that although the current market is dominated by risk aversion, the energy transition is the core long-term force driving silver demand, and geopolitical events (such as the Russia-Ukraine war) have actually reinforced this trend.

Core Views

  • The energy transition is the biggest driver of silver demand, with an influence far exceeding short-term macro risks.
  • Silver is irreplaceable in green technologies such as electric vehicles (EVs) and solar panels, with demand growth being structural.
  • Non-industrial demand (jewelry, silver coins, etc.) is also recovering modestly, but industrial demand is the long-term main theme.
  • Silver is historically undervalued relative to gold, and the supply-demand fundamentals (continued supply contraction vs. structural demand growth) support a bullish outlook.

Key Arguments and Data

1. Surge in Electric Vehicle (EV) Demand:

  • By 2030, EV sales are expected to account for over 30% of global light vehicle sales, primarily driven by China, Europe, and the United States.
  • Each battery electric vehicle (BEV) uses approximately 25-50 grams of silver for lightweight, highly conductive connections between batteries and components.
  • Current EV inventory backlogs are severe: Ford's F-150 electric pickup truck has an order backlog of up to 3 years, and some Tesla models have orders queued into 2023 (even after price increases).
  • Solar panels have also recently experienced order backlogs.

2. Modest Recovery in Non-Industrial Demand:

  • Silver used in photography (a small and declining share) saw a slight rebound after the pandemic due to demand for medical X-rays.
  • Jewelry and silverware: A significant rebound in 2021, but still below pre-pandemic levels. Recovery in Indian weddings and social activities boosted jewelry production; economic recoveries in Italy and China also drove demand.
  • Silver coins and bars: Physical investment demand in 2021 grew by 36% year-on-year, accounting for 25% (i.e., one-quarter) of global silver demand. Since 2016/17, demand in this category has not declined.

3. Worsening Supply-Demand Imbalance:

  • The silver market has been in a physical deficit since 2019.
  • Mine supply has been declining since 2016, with insufficient funding for new mine development and a lengthened timeline from discovery to production.
  • All demand segments (industrial, jewelry, physical investment) are recovering, while supply cannot keep pace.

Companies/Assets Involved

  • Ford: Announced it would double production of the F-150 electric pickup to clear a 3-year order backlog.
  • Tesla: Some models have order backlogs extending into 2023, even after price increases.
  • Silver: The author is bullish, with the core logic being supply constraints combined with structural demand growth driven by green technologies.

Investment Implications

  • Go long on silver: Silver is currently in a historically undervalued range relative to gold, and the supply-demand fundamentals (persistent deficit, declining mine supply, rising green demand) provide long-term support.
  • Focus on energy transition-related silver demand: EVs and solar panels are key growth points; even if the global economy slows, the decarbonization trend will continue to advance.
  • Beware of short-term volatility: Current macro risks (interest rates, risk aversion) may suppress silver prices, but the long-term structural logic remains unchanged.
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