Record Silver Shortage in 2020?
November 19, 2020
By Patrick A. Heller
On Nov. 17, the Silver Institute issued their annual interim Silver Market Review. This report was prepared for the Silver Institute by consultants at Metals Focus. This Review includes historical supply and demand statistics and projected 2020 data. You can read their summary here.
As you might imagine, both supply and demand of silver declined in 2020 as a result of the economic lockdowns imposed in response to the COVID-19 coronavirus pandemic. Projected 2020 supply and demand both are likely to fall to their lowest levels in more than a decade.
The primary components of supply are worldwide new mine output, which looks to be at its lowest level since 2011, and recycling (projected to be at its highest level since 2013). Two minor components are 1) hedging activity, which should be in net demand rather than supply in 2020, and 2) official sales. Official sales have become negligible since the last three governments or central banks to hold any significant silver inventories (India, Mexico and the United States) pretty much depleted their holdings many years ago.
The largest components of physical demand are industrial manufacturing, jewelry and investment. Industrial demand in 2020 is forecasted to be at its lowest level since 2015, while jewelry demand is projected to be at its lowest level in more than a decade. In contrast, physical investment demand looks to be at its highest level since 2015. The U.S. is the world’s largest retail investment market, where demand may rise 62 percent in 2020 from 2019 levels. This more than offsets an estimated 20 percent decline in demand in India, the world’s second largest retail investment market.
Minor components of demand are 1) photography, which has declined almost every year since the advent of digital photography and digital x-rays, 2) silverware, which is also experiencing a general drop over the decades, and 3) net hedging demand.
The forecasted combined net result of physical supply and demand is a 2020 surplus of 31.5 million ounces. However, that figure is not the bottom line. In 2020, it looks like net investment in exchange-traded products (especially exchange-traded funds like SLV) will reach 350 million ounces. When you factor in this demand, which is touted as physical demand, but may be largely on paper), the net silver shortage for 2020 could be 318.50 million ounces!
If accurate, this would, by far be the largest ever annual shortage of silver supply versus demand!
As calculated by market analyst CPM Group, the previous largest annual silver shortages, from 1991 to 2000, ranged from 111 million to 196 million ounces. The shortage in 2020 far exceeds those levels.
One thing to keep in mind is that none of the reports of worldwide supply and demand are ever precisely accurate. These analyses include estimates from markets where data isn’t available. Further, some reported data, such as from India, does not include supply and demand for smuggling and other off-the-books transactions. What is useful with these periodic reports are the trends over time. For the 2020 projected supply and demand data in this week’s report, any underlying errors in the totals would not change the fact that the annual silver shortage looks to be the largest ever!
The amount of silver theoretically owned by exchange traded products now exceeds 1 billion ounces. These investment funds are marketed as representing ownership of physical silver inventories sufficient to cover 100 percent of the outstanding shares. However, there are several factors that indicate this is not necessarily true:
- Some exchange traded products disclose that they may lease out some of their silver to generate some income. The ability to reclaim such physical silver in the short term is doubtful.
- Some of these funds may lease silver from other parties to technically allow them to claim they have title to sufficient silver to cover all outstanding shares. However, leased silver may be subject to recall at or before lease maturity, meaning the fund might not be able to deliver physical silver when demanded by fund owners.
- It is almost certain that some of the silver inventories held by exchange traded funds are pledged as collateral to third parties. Therefore, even to the extent that these investments may potentially be covered by actual possession of physical silver, they may not actually be available for delivery as promised in the terms of the funds’ operations.
- These funds claim to audit their physical holdings to verify their existence. However, the larger funds may have holdings in vaults around the world. The sub-custodians may simply provide a statement that they have the physical inventories, but no actual audit of their existence may be required or conducted by the fund.
To the extent that exchange traded products may not have all the physical silver they claim, such shortfalls would only add to the reported silver shortages. The record annual silver shortage projected in this week’s report provides a solid base for silver prices to rise significantly in the short to medium term.
Note: The projection for higher silver prices is independent of this week’s forecast by Citibank that a successful rollout of a COVID-19 vaccine could result in a fall in the value of the U.S. dollar by as much as 20 percent within the next year. A falling dollar would almost certainly support much higher gold and silver prices, without regard to supply, demand and inventory factors.