Silver quoted in euros ended the year at about +9%! Despite this, its price remains low. How long can silver remain so cheap? Dear contrarians, hear ye...
Demand exceeds supply
Silver is a monetary metal, of course. But its industrial component is much more important than gold (photovoltaic panels, electric cars, medicine, electronics...).
The Silver Institute's report tells us that total silver demand grew by 5% in 2022. On the other hand, supply has only grown by about 3%. Demand for silver was already greater than supply in 2021, and this imbalance even worsens by 38% in 2022.
Investment demand in particular (coins and bullion) increased by only 0.18% in 2022. But if this situation between supply and demand continues, the price cannot stay so low forever. And the demand for investment will logically increase when the price... goes up again.
The mining sector
Currently, the price of silver metal remains close to its production cost. This affects the profitability of the sector.
Moreover, about 75% of silver metal comes from non-silver mines. These are gold, lead, copper and zinc mines.
These mines do not seek to extract silver in particular. Even less at the current price. Silver is a by-product and only offsets their total production costs. But it can of course pose problems of profitability. So these producers also expect (and in some cases need) a higher silver price.
And with respect to silver mines, investors discouraged by the low silver price have sold their shares, driving down the market capitalization. This, in turn, hurt companies, both in terms of production and growth.
Most primary silver producers are unable to generate positive free cash flow. It is clear that a sector cannot remain unprofitable indefinitely.
Mining companies have already cut costs to the bone. They can only go so far, especially given the high inflation that is impacting the mining sector as well as all others. The price of silver must eventually rise to reflect this.
At the current price of 22.3 euros/ounce, silver metal is recording a gain of +9.4% in euros over the year 2022.
On the long term monthly chart below, we can see it still moving in its consolidation box that started in August 2020.
The gray metal came to work the support of this box during the summer of 2022 before rebounding 37% from its low on August 29, 2022.
We see the Bollinger Bands tightening and moving to the horizontal. This is a good sign.
The best thing would be to see the volatility reduce to signal a consensus on price. Then, to come and work the resistance of the consolidation box around 25 euros/ounce to finally break this resistance and come and look for its historical high of 2011 around 34 euros/ounce.
Is this the scenario that awaits us for 2023? We don't have a crystal ball, but the long term outlook is very positive for silver!