While silver’s retreat from the 8-year high suggests that the media-inspired short squeeze has failed and further correction is likely, the metal should benefit from the global economic recovery and the new US fiscal stimulus package in the longer-term. Although both are in the precious metal category, silver will be a better play than gold in terms of fundamentals. The latter is positioned to benefit from a green energy theme.
Gold’s rally last year was mainly driven by investment demand as the pandemic-hit economy led to a rush for safe haven. Indeed, 2020 was the first year than investment demand exceeded jewelry demand for the yellow metal. Industrial (technology) demand for gold takes up less than 10% of total. As such, the global reflation theme may not bode well for gold.
By contrast, silver’s use in the industrial sector suggests that the metal is well-positioned to benefit from global economic recovery. GFMS’s data shows that industrial demand contributes to about 50% of total silver demand. The industrial use of silver mainly lies on automotive and solar energy, the rise in hybrid (including mild-hybrids) and battery electric vehicles, both require higher silver loadings than vehicles with an internal combustion engine, will in the longer-term increase silver use.
Silver’s use in solar energy takes up 20% of the industrial demand, or about 10% of the total demand. US’ climate change mitigation plan could lift demand for the metal. The Biden administration last month announced a new climate change agenda, planning to decarbonize the country’s power sector by 2035. It also plans to make the country a 100% clean energy economy with net-zero emissions by 2050. Reliance on solar energy is prone to rise for the years ahead, benefiting silver. The next stimulus could be the announcement of the renewable energy plan. A significant amount of green capex allocating to solar panels should give another boost to silver price.