Here is the big picture for silver, plus consumer savings has collapsed, inflation and more.
Savings Has Collapsed
May 27 (King World News) – Liz Young: Getting a little buried in headlines is the personal savings rate fell to 4.4%. Well below the pre-pandemic avg (yellow dotted line) and lowest since ’08. Consumers are spending, not saving. Question is: how long can that last?
Consumer Savings Has Collapsed
How Long Can Consumers Continue To Spend?
Costco Says Inflation Impacting Consumer Spending
Peter Boockvar: For those of us trying to use the past few weeks of retail earnings reports to distill what consumers are now focused on with their spending, here is what Costco said in its earnings call about what they are seeing:
“The best performing categories in Q3 were candy, sundries, toys, jewelry, kiosks, home furnishings, apparel, bakery and deli.”
So, food, home, stuff for the kids and some jewelry with people back out in their social lives.
“Underperforming departments were liquor, office, sporting goods and hardware, all of which were quite strong a year ago.”
So, a bit of a give back as some of these purchases don’t need to get repeated each year and I guess the liquor thing is mostly likely due to more eating out at restaurants and bars. Also, less spending on sporting goods is because all the gyms have reopened and with many back in their offices, less need for spending again on the home office…
This is what Costco said on the inflation front:
“First of all, it continues. Pressures from higher commodity prices, higher wages, higher transportation costs and supply chain disruptions all still in play. For Q1, we estimate price inflation was in the 4.5% to 5% range. For Q2, we had estimated 6%-ish, if you will. And for Q3 (the one just reported) and talking to our merchants, estimated price inflation was in the 7%-ish range.”
They did not give guidance on what they expect for their current fiscal Q4.
More “Transitory” Inflation
On the container shipping market and with Shanghai slowly reopening again, the World Container Index Shanghai to LA price looks like it has bottomed out for now as of yesterday’s close. At $8,720, it is off the pre 2021 holiday peak of $12,424 but is still more than 4x where it was pre covid.
Shipping Costs 4X Pre Covid
Maria Smirnova, Managing Director at Sprott Asset Management: My colleague Paul Wong wrote about silver’s recent flat performance in his recent monthly, April Pressures Risk Assets. Wong aptly explained silver’s interesting role: “Silver has a distinct duality pricing function that, at times, may be contradictory due to its industrial component and its monetary role.”
In this report, we provide our current outlook for silver. Ultimately, we believe recent market dynamics are creating short-term headwinds for precious metals from a monetary standpoint, but those trends could reverse – and silver supply constraints are likely to become more relevant in the face of sustained demand, with notable momentum in silver’s industrial uses related to the green energy transition…
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Silver’s Behavior Since COVID
Silver bullion posted a 47% gain in 2020 (see red oval in Figure 1) and has recently been in a holding pattern. Despite this, silver traded in the range of $22-$28 in 2021, and its average price for the year reached a nine-year high of $25.14.
Since silver’s outperformance in 2020, the global macroeconomic environment has changed dramatically and become increasingly volatile. Markets continue to grapple with the impacts of the COVID pandemic, geopolitical concerns have increased substantially, and the recent sell-off of stocks has not yet found a stopping point. Rising interest rates have created a headwind for precious metals assets, particularly gold and silver.
Silver is More Volatile than Gold
Silver’s response to current macroeconomic challenges has been to follow its traditional pattern of reacting with more volatility than gold. Silver is down modestly YTD; priced at $23.35 per ounce on December 31, 2021, it was $21.72 as of May 23, 2022, a decline of 7.02%. Gold, by contrast, gained 1.38% YTD through May 23. Both are strong showings, given the S&P 500 declined 16.65% in the same period.
But to fully understand our current positive outlook for silver, we should revisit the supply-demand dynamics of the silver market — the fundamental relationship that directs long-term pricing trends. To assess these dynamics, we looked to the annual silver outlook published by the Silver Institute and Metals Focus in April, the World Silver Survey 2022.
Although the risk-off tenor of the moment may be a headwind for short-term silver pricing trends, over the longer term, we believe silver supply constraints will become more relevant in the face of sustained, growing demand.
Silver Supply Headwinds in the Post-COVID Era
As expected on the back of silver’s price rise in 2020, silver mining rebounded in 2021 — but to a lesser degree than forecasted. Mine production was up about 5% in 2021 from 2020 levels. Recycling volumes grew by 7% as higher pricing attracted more scrap to the market. Still, Metals Focus analysts had predicted growth for mining supply to be higher, in the range of 8%. As shown in Figure 2, silver supplies have dropped into a deficit since last year, and Metals Focus analysts predict another sizeable deficit of 72 million ounces in 2022.
In addition to tighter silver supply, silver grades have been declining for several years. Ore grades depend on several things, including rising silver prices (which make it profitable to accept lower grades) and how the silver is mined. Going forward, mining companies will likely have to invest more in exploration and development in order to increase or even maintain supply.
Byproduct prices are also a big input for total silver mining activity. More than 70% of silver mining supply is a result of byproduct mining. Higher prices for byproduct metals — lead, zinc and copper, for instance — drive higher mining activity for those metals, essentially subsidizing silver mining in the process. That impact has contributed to supply in recent quarters. But, it’s a tailwind to supply that is potentially at risk. If macroeconomic conditions soften in the medium-term and price support eases for those byproduct metals, silver mining supply is also vulnerable. Without the subsidy effect of higher byproduct prices, the outlook for silver supply could be even weaker than expected.
Miners must also contend with inflation, which directly impacts their fuel costs in production and exploration. If costs are expected to increase and silver miners aren’t sufficiently confident in higher silver prices, it’s difficult to envision a scenario where they are likely to ramp up mining activity substantially. There are also continued reports of worker shortages in silver mining as the tight labor market and waves of COVID outbreaks hamper operations in some locations.
These supply trends have already resulted in a drop in global silver reserves. In 2021, 122 million ounces (Moz) of silver were added to reserves, but 270 Moz were taken in production, as shown in Figure 5. Reserves dropped by about 4% to 3,412 Moz at yearend. Exploration and discoveries were also underwhelming in 2021. Globally, total identified silver resources (excluding reserves) only grew 1% last year. At the same time, there was subdued merger and acquisition activity in 2021 in the primary silver sector, with only eight deals totaling just US$11 million.
Silver Demand: Green Technologies Support Sustained Growth
While silver supply faces some constricting trends, the rebound in demand could prove sustainable, thanks to silver’s critical role in growing green energy initiatives.
Photovoltaic demand — silver inputs for solar panel production — is a prime example, growing 13% as a category in 2021 and contributing to a new record high for global silver demand in 2021. This rebound, even in the face of the supply-chain constraints that have plagued global manufacturing since COVID began, reflects the substantial green-energy investment that is underway.
We believe this trend could drive continued demand growth even if other manufacturing activity softens incrementally. Industrial demand overall accounts for about half of annual silver demand, and photovoltaic demand is about a fifth of all industrial offtake (and growing in share, since photovoltaic is growing faster than overall industrial use at large).
The outlook for green energy investment has only strengthened in the face of the Russia-Ukraine conflict, which is pushing global sentiment towards energy security and renewables. Vehicle electrification and renewable energy demand could have more staying power in an environment where developed economies are turning a corner toward weaker growth or even recession. Industry forecasts project that silver demand for electric vehicles is likely to eventually surpass the volume of silver used in photovoltaics. As Paul Wong discussed last month, silver prices have demonstrated a growing correlation to energy transition equities. According to Wong, “Silver pricing has become highly correlated (R-square of 0.82) with energy transition equities, as illustrated in Figure 7. This Energy Transition Index is comprised of 12 large ETFs in the energy transition space (solar, renewables, wind, carbon, infrastructure, uranium, etc.).”
The Energy Transition Story is a Large Force for Silver
The current environment may be dominated by risk-off behavior, but that’s not the primary factor for longer-term silver demand, particularly given its dual nature as a precious metal and an industrial metal.
We see the energy transition story as a large force for silver demand — this year and in future years. The geopolitical issues dominating the current environment only strengthen that trend, even as they weaken other components of silver demand. The pandemic and the war in Ukraine have both served to reinforce investment in energy-transition initiatives.
Silver is a critical component of electric vehicles (EVs), which are experiencing strong demand growth globally. EV sales are slated to represent >30% of total light-vehicle sales by 2030, mainly stemming from China, Europe and the U.S. EVs are going to require a new set of manufacturing materials versus traditional ICE (internal combustion vehicles) vehicles. Silver’s high conductivity and ductility make EVs more efficient by establishing lightweight but strong electrical connections between batteries and other car components. Battery electric vehicles use between ~25-50 grams of silver per vehicle.
At present, EV inventories remain backlogged. Ford announced in January that it would double production of its electric F-150 pickup truck to work through a three-year backlog. Tesla reported that some models were backlogged until 2023, even after price increases. Solar panels have also been backlogged in recent months, according to some reports.
Positive Non-Industrial Demand Trends
Looking at non-industrial demand for silver, trends have been milder but positive. In photography — which represents a small and declining share of silver demand — there was a small post-COVID rebound related to the catch-up trend of X-rays in healthcare after lockdowns subsided. Jewelry and silverware are more closely tied to economic growth, and both rebounded substantially in 2021. The return of weddings and social events in India supported higher jewelry production. Italy and China also accounted for healthy rebounding demand for jewelry amid economic recoveries. Silverware also reflected these trends. However, jewelry and silverware purchases both remained below pre-COVID levels.
Physical demand for silver coins and bars is the most volatile category of demand (and hard to get real-time data for mid-year). Physical demand grew 36% in 2021 over the year prior, driving the category up to represent a full quarter of global demand for the year. Bar and coin investments have not retreated since 2016/17.
Why We Remain Bullish on Silver
From a pricing standpoint, silver is historically undervalued relative to gold right now, and offers an attractive investment opportunity. We see a picture of silver fundamentals where supply trends cannot keep up with longer-term demand. Overall, the silver market has been in a physical deficit since 2019, and silver mine supply has been in decline since 2016. There has been a lack of funds going into silver mine development and the timelines from discovery to production have gotten longer. On the demand side, all segments of silver demand are rebounding, led by industrial, jewelry and physical investment. We continue to believe that silver is likely to benefit from supply constraints in the face of growing demand. We expect green technology and de-carbonization trends to continue and increase, even if economic growth slows globally.
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