Investors will all agree that war is generally bullish for commodity prices but the aftermath of the recent conflict in Ukraine is likely to be very important to the silver market due to silver’s unique properties. Silver is the best metallic conductor of electricity and is essential for pioneering carbon reduction technologies which are the focus of western governments. What the Ukraine invasion has taught governments is the need for their energy importing countries to become energy independent.
Europe endured a crisis over the summer of 2022 as Russia reduced gas flows to as low as 341 gigawatt hours per day from 3,396 gigawatt hours per day in early 2021. Europe was not prepared and suffered sky-high energy prices which led to governments publishing emergency plans to shut down certain industries to ration energy in the winter as a last resort to protect the public. For energy importing nations such as Europe, it became clear that they needed to increase their domestic power production as energy related commodities such as gas or oil can be weaponized if exporting and importing nations see a rise in tensions.
The push for energy independence is likely to come from two sources, increased renewable power generation and ensuring that the electrification of vehicles increases. Silver is an important input into the manufacturing process for solar panels and electric vehicles and, given its status as the world’s best metallic electricity conductor, silver is going to be essential in the improvement of electronic vehicle battery and solar panel performance.
The rise of geopolitical disputes creates risks for countries that rely on other nations to supply them with gas which is an essential commodity for power generation. The modern-day economy cannot function without reliable energy supply. Governments have increasing pressures to reduce their dependency on foreign powers and renewable power generation is likely to be the best solution for that.
Silver is largely an industrial metal given that 60% of its demand comes from industrial purposes. Of this 60%, it is estimated that 80% of this silver will eventually be dumped in landfills. This leaves only 40% of silver supply available for investors to buy in the form of silver bullion coins or bars. In the absence of any new discoveries of significant silver deposits, it is likely that the looming surge in silver demand as countries rush to increase the electrification of transport and renewable power generation, will put the physical silver market in a deficit.
Silver investors are likely to hold the key to breaking this deadlock by selling their silver bars and coins into the market which adds supply, but it is unlikely that they will be willing to do this in large enough size at today’s silver spot prices. The silver price will need to be revaluated much higher to attract enough sellers to match the rise in industrial demand for silver to increase domestic power production through solar photovoltaic panels which, importantly, will need to be refined to increase their efficiency. Silver is likely to play a central role in this process given how it is the best conductor of electricity.
The current silver price looks to offer relatively good value as it trades at a ratio of one gold ounce to 90 silver ounces. This is an undervaluation of silver compared to gold which is in part attributed to the central banks buying gold in very large volumes. They did not buy silver because its lower value will mean increased storage and transportation costs relative to gold. The buying of gold by central banks caused a large rise in gold demand which was not seen in the silver market. This is a key reason to why gold appreciated against silver.
What is a clear signal that silver is undervalued is the distinct lack of media coverage of silver as an investment theme. The lack of interest in silver makes it very unlikely to be overvalued and will likely offer an excellent entry for the contrarian investor. Retail investors often complain of a lack of investment prospects but as many seasoned analysts have suggested in the past, their frustration is really because they are unable to identify these opportunities before they become obvious to the masses. Mainstream investors are not paying attention to silver.
As silver functions as an industrial metal but also has some safe haven properties, it has a tendency to show steady price action for years before booming when silver demand increases due to its role as a monetary metal. This means that when investors start to buy silver bars and coins to protect their wealth against falling currencies and other assets, the rush of capital into the small silver bullion sector can cause a rapid bonanza resulting in large profits for early entrants.
On the date of publication, Levi Donohoe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.