Silver price’s rally has accelerated over the past weeks. Currently trading at US$ 22.65/oz, price has jumped +27% ytd. Yet, much of the gains (22% out of 27%) was made in the first three weeks of July. With its dual properties, as both industrial and precious metals, silver will continue to benefit from global economic recovery amidst high uncertainty.
On the demand side, industrial demand takes up about 50% of total silver consumption. Silver as an industrial metal allows the price to benefit from global economic recovery. The latest report by Markit reveals that global manufacturing PMI jumped +7.9 points to 47, the highest since January, in June. The index, rebounding from the record low of 32.5 in April, signals that the worst of global economy is behind us, although the pace is divergent among different countries. China’s economic recovery has gathered momentum. This bodes well for silver price as China is the largest consumer of white metal in terms of industrial demand.
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Similar to gold, investment demand for silver is facilitated by its safe-haven characteristic- as a precious metal. Although the global economy has gradually been improving from the sharp contraction in March, the outlook remains highly uncertain. Concerning the coronavirus pandemic, there are reports of resurgence of new cases in different countries such as the US, Brazil and Australia. Risks to growth are skewed to the downside. Against this backdrop, investors are keen on diversifying their portfolios to assets like gold and silver. Meanwhile, global monetary policies are expected to remain accommodative for the years ahead. The protracted low-yield environment has lowered the opportunity cost of holding silver. Currently standing at an all-time high of 835.5M oz, institutional investors have accelerated their silver holdings through ETFs since 2Q20 as the coronavirus pandemic has caused severe damage to the world economy. Silver holdings climbed +6.23% in 1Q20, followed by a sharp rise of +19.8% to 772.74 in 2Q20.
Physical investment is also expected to increase. According to Silver Institute, purchases bars and coins (physical investment) are expected to gain +16% y/y in 2020. This should partly offset the drop of jewelty fabrication demand of -7% (forecast).
Silver’s supply is contributed by mine production, recycling, hedging supply and official sector sale. Of which mine production takes up an overwhelmingly 80%. Mine supply has been disrupted in Mexico and Peru, the two largest miners taking up about 40% of global output, amidst governments’ restrictive measures to curb the spread of the virus since early March. Although operations have largely resumed, it takes time for production return to full capacity.