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Understanding Silver Demand Sources

Silver is so unique, I like to call it the ‘Irreplaceable Metal’. In many ways, that’s true because it’s more or less equal parts money and industrial metal, and because trying to substitute with other metals in many of its industrial applications is either impossible, or nearly so.

Since this letter is all about silver, it’s worth taking the time to better understand silver’s many demand drivers.

Silver is a multi-purpose metal, with new applications being developed on a regular basis.

Consider that silver is the best conductor of heat and electricity. That makes it highly prized in electronic components like wiring, switches and printed circuit boards. As one of the most reflective substances, silver is crucial to solar panels. Since it’s both malleable and ductile, silver makes for beautiful jewelry and silverware. These characteristics also make it ideal for micro-electronics like tablets and smartphones, since it can be shaped and pressed into minute spaces without the risk of breaking.

In many cases, gold can serve the same purpose as silver. The advantage that silver has is its price. Of course, it’s more costly than say copper or nickel. Often, that doesn’t matter, simply because they don’t have the same physical properties. What’s more, many times only very small amounts of silver are required, like in smartphones, making the cost factor nearly irrelevant to the overall production cost.

The following chart details silver demand from various sectors for 2020.

Within each of the sources of demand, there are more specific subsectors, some of which I will touch on below.

Silver in Medicine
An effective biocide, silver is exceptionally good at killing and limiting bacteria. This application goes way back, when silver coins were placed in wine and water containers as a way to preserve freshness.

Today, it’s used in countless water purifiers to thwart bacteria and algae from accumulating. Many water purification systems in public pools, municipal system water treatment, and hospitals have silver ions added to fight contamination.

In recent years, researchers have discovered that silver is effective at penetrating the cell walls of bacteria, breaking down their inner chemical structures. And it accomplishes all that while leaving mammalian cells unaffected.

Today, silver continues to reveal ever more applications. To kill bacteria and limit infections, it’s embedded in medical equipment like breathing tubes, catheters, needles, stethoscopes and surgical tools, and it’s applied to surfaces like door handles and furniture.

Silver in Automobiles
As the ‘green revolution’ takes hold and the world gravitates increasingly towards green/clean energy and energy conservation, silver will have a crucial role to play. That’s because more silver is used in environmentally friendly technologies than in conventional ones. The Silver Institute expects that, within just four years, the first and second most important industrial demand sectors for silver will be solar and automotive.

Silver’s high thermal and electrical conductivity make it ideal for use in light vehicles. As a result, the metal is found in navigation, infotainment, power steering, driver alertness systems, auto-braking, and other safety features.

According to the Silver Institute, silver demand from the automotive sector will be robust for several years into the future. Current automotive silver requirements are about 60 million ounces annually, but forecast to rise by 50% to 90 million ounces by 2025.

Consider that traditional internal combustion engine vehicles use about 0.5 – 1.0 ounce (15- 28 grams),hybrid vehicles demand 0.63 – 1.35 ounces (18-38 grams), and electric vehicles are up around 0.9 – 1.75 ounces (25 -50 grams). Given the rapid rise in hybrid and electric vehicle adoption, silver demand growth from the automotive is likely to remain elevated.

Here's the outlook for growth of hybrid and electric vehicles:

Silver in Solar Panels
Photovoltaics, also known as solar panels, are the single largest industrial application for silver. Each year, this subsector alone consumes an impressive 100 million silver ounces. And that’s expected to grow, despite thrifting efforts.

Naturally, solar panel manufacturers are always looking to lower costs. One way is to reduce the silver content of each panel. There are, however practical limits to such reductions. Substitution is another, but as I explained earlier, silver’s reflexivity and conductivity are unmatched, making it the go-to metal for
solar panels. Thrifting efforts have led to an 80% drop in the average quantity of silver required over the past decade. But the demand level has still maintained around 100 million silver ounces for the past five years, thanks to growing demand for solar panels.

And that has made photovoltaics the leading source of green electricity, and the cheapest form of renewable energy. Solar installations are up 380-fold over the last 20 years.

Growth of Solar Installations 2001 – 2020E

As a result, projections for the growth of solar power are impressive. According to Facts & Factors Marketing Research, the global solar energy market in 2019 stood at $50 billion. They forecast a compound annual growth rate of 20%, expecting the global solar market to reach around $200 billion by 2026.

Thrifting may be reaching its limits, as manufacturers face concerns about compatibility and reliability of potential substitute materials. This, combined with expected growth, bodes well for elevated demand levels of silver from the photovoltaic sector.

Silver in Photography
Traditional film photography has all but disappeared for the vast majority of consumers. Professionals as well have migrated to digital photography as the quality, flexibility and convenience are irrefutable. As a result, silver demand from this sector has fallen dramatically over recent decades, and is less than half today of what it was ten years ago. The Silver Institute reports that global photographic demand was 61.6 million ounces in 2011, but dropped to 27.56 million ounces by 2020.

Still, there’s a resurgence of interest in using ‘old-school’, silver-based instant photography like Polaroid cameras and 35mm camera film. And some commercial movies still use silver-based films for their ability to capture fine detail and color. As well, developing countries still use silver-based X-Rays due to lower costs.

Silver in Electronics
Electronics is another demand sector where silver is simply indispensable. Look around you. You’ve probably got a smartphone, tablet, laptop or desktop computer, or flat screen TV. Many of us have several of these. And that’s just on the consumer side. Think of commercial, industrial, medical and military electronic equipment the world over. Most of these modern devices use silver, even if it’s a very small amount. That’s why silver can be found practically everywhere. And that’s why nearly one-third (32.5%) of global silver supply finds its way into electronics.

Precious Metals Volume Into Electronic Markets

Demand for silver in printed and flexible electronics is about 48 million ounces annually. The Silver Institute forecasts demand will rise to about 74 million ounces in 2030, absorbing 615 million ounces of silver in this decade. As technology becomes increasingly commonplace in our daily lives the world over, printed and flexible electronics are likely to play a bigger role. Consider that wearable electronics like smartwatches, appliances, medical devices and a host of internet-connected devices are exploding in use. Sensors for light, motion, temperature, moisture and motion all make use of printed and flexible electronics.

So, it’s natural that the electronics subsector promises to be the fastest growing demand for industrial silver usage.

Silver in Jewelry and Silverware
Silver has long held an esteemed place in jewelry. Noted for its lustre, workability and more accessible pricing, silver remains a popular choice for fashion jewelry to this day. Although pure silver is considered 99.9% silver or 0.999 fineness, it’s typically alloyed with other metals to harden and strengthen it. Copper is most commonly used to form ‘sterling silver’, which is 7.5% copper and 92.5% silver.

Also known as 925 silver, sterling has been the standard worldwide for centuries. Its resilience makes for superb rings, bracelets, charms and necklaces. This is especially true, with India and East Asia representing about 65% of silver global silver jewelry demand.

Silverware has long been popular, with sterling silver the standard fineness used in silver hollowware and flatware since the 1300s. It’s fashioned into bowls, vases, cutlery, decanters and candlesticks, to name just a few. Many of us have heard the expression “born with a silver spoon”. It means to be born into a wealthy family.

But the phrase is thought to go back to the late 18th century. That’s when godparents gifted silver spoons to their godchildren, and British royals dined using silverware. Babies fed with silver spoons back then were thought to be healthier than those who used utensils made from other materials. But silver’s antibacterial properties probably contributed to the term, and likely did help keep many babies safer from infections. Today, silverware represents about 6% of silver demand, with most of that coming from India.

Silver’s Emerging Applications
The Silver Institute’s World Silver Survey 2021 highlights three new and emerging uses for silver. One of these is cold sintering silver powder. That’s when small silver particles are compressed together. Their better thermal and conductive properties allow silver to improve and enable technologies, like in semiconductors, where lead soldering may be replaced by cold sintered silver. Many applications require lower temperature soldering, particularly wireless communication, medical, automotive, aerospace and aviation, as they’ve dealt with fatigue and failure issues. As well, cold sintered silver offers the advantage of being processed on a smaller footprint without moving, making for a more precise control. This also helps minimize the effects of heat on other sensitive components. Silver sintering’s superb optical transparency, conductivity and flexibility make it ideal for solar cells, displays and touch screens, while using less energy and aiding the environment.

5G cellular communication technology is another field to benefit from silver. Small-cell base stations should outnumber those in 4G networks by 40-60 times, multiplying the need for multiple-input/multipleoutput (MIMO) antennae and switch contacts in relays and inverters. This, combined with more widespread Internet of Things (IoT) for cars, healthcare, agriculture and connected cities will help push silver demand much higher.

Induction charging, such as the wireless charging we see in electric toothbrushes, smartphones and smartwatches, is on the rise as consumers move towards frequent and wireless charging. Vehicle charging may be next, but certain issues need to be overcome. Induction charging is currently less efficient than plug-in charging, and paying for the infrastructure for vehicle charging is another issue. But these will be overcome and lead to much wider adoption, furthering the demand for silver.

Silver Investment
In my view, silver investment will be a ‘wild-card’ factor that will help drive overall demand for the metal much higher in the next several years. It’s probably the most underrated, and perhaps most misunderstood aspect of silver demand.

I see two big reasons for this. First, silver bugs are wild about silver. I mean, they really love their silver. I get it. I too love silver. For some, it borders on cult.

The other big reason is related. It’s because sentiment plays such a huge role in investing, and yet it’s one of its least understood aspects. I think that’s especially true for a relatively small market like silver, whose fans are very committed…and driven. I’ll go into more detail on this later.

In my experience, years of researching, investing, and tracking silver markets can help provide a ‘feel’ for sentiment. It’s part art and part science. There are multiple technical indicators that suggest potential strength, weakness, or neutrality for silver and silver investments over particular time frames. And there are aspects that can’t be measured. Instead, living and breathing this market can give one a sense for what may lie ahead in the near, medium, and longer terms.

I expect many strong demand years ahead in part because of developments in the silver investment markets in 2019, but in particular in 2020 and early 2021.

We’re in an environment where interest rates are being kept artificially low (near zero) for years, while currencies are being dramatically diluted through printing. I’m impressed, in fact, at the rate at which investors in general are realizing this, and taking action.

But as I explained earlier, silver is minuscule market compared to other traditional investments like stocks, bonds, and even gold. That means relatively little buying can drive outsized price gains.

When talking about investment in silver, there are essentially two general sources from the demand perspective. The first is physical demand in the form of bars and coins. That’s when people buy these items from bullion dealers or other suppliers.

The second is demand from the Exchange Traded Funds (ETF) sector. ETFs hold silver on behalf of investors in the form of 1,000 oz. bars, which are also known as commercial bars. However, ETFs are like equities traded on stock markets. As such, they are easy to buy and easy to sell. And their 1,000 oz. bars can be taken as physical delivery by larger investors, or even industrial consumers who might melt them down and otherwise use them in products.

Because most of these bars simply remain in vaults and have not been converted into coins or smaller bars, many industry researchers do not include ETF demand as part of physical silver demand. I think this is a mistake, since silver buying tends to be ‘sticky’. This means that typically, once investors buy either physical or ETF silver, they tend to hold onto it and not sell. In my view, once silver is bought by an ETF, it tends to be removed from the overall supply of silver. This tendency has been observed for more than a decade. And in the past few years it has intensified.

That’s why I feel that not including silver ETF demand as part of overall demand does not give a realistic picture of the silver market. Instead, including it can lead to major shifts in the supply/demand balance. Let’s look at the statistics from the Silver Institute’s World Silver Survey 2021.

As you can see from the table above, which I’ve highlighted, Net Physical Investment in 2020 was 200.5 million ounces. That made for a total silver demand of 896.1 million ounces, and a market surplus of 80.1 million ounces. However, Net Investment in ETPs (ETPs are Exchange Traded Products, another name for Exchange Traded Funds) was 331.1 million ounces. Given that total supply was 976.2 million ounces for 2020, ETP demand represented more than one third of the entire year’s supply. Yet this amount is left out of demand and is listed separately.

When included, however, in the Market Balance less ETPs, the silver market was in deficit of 251 million ounces. That represents more than 25% of the entire supply of silver for 2020. And still this figure is shown separately.

Although 2020 may have been an exceptional year, here’s another point to consider. Adding together Net Physical Investment of 200.5 million ounces with Net Investment in ETPs produces a total of 531.6 million ounces. And that represents 54.4% of the 976.2 million ounces of supply. More than half of all
silver supply for 2020 went to physical investment and ETPs.

It’s interesting to note that, according to the Silver Institute and BMO Capital markets, Solar and 5G telecommunication technologies, along with physical investment should be the fastest growing sectors of silver demand over the next decade.

What’s more, these institutions forecast a supply deficit starting this year that’s set to markedly increase through the next ten years on balance.

Silver Supply Deficit Forecast to Grow

All of this tells me silver is set to be a lucrative market to invest in for potentially the next decade. And I think the best way to play it is by holding a diversified basket of silver explorers, developers, and producers. That’s because they offer leverage to the silver, compounding gains in a rising price environment.

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