Silver supply and demand!

Dear Investor,

Silver is a highly popular asset for Australian precious metal investors. It can be purchased in multiple forms, from pool-allocated silver, to coins as small as 1 troy ounce, to 1 kilo and 5 kilo ABC Bullion cast bars, which tend to be more popular for those wanting to invest larger sums.

Like the gold price, silver is also influenced by a range of macroeconomic factors, including but not limited to inflation rates and the direction they are heading, movements in the value of the US Dollar, and changes in interest rates.

There are also some important differences between gold and silver, both in terms of their investment characteristics, and the role they can play in a portfolio, as well as their underlying supply and demand profile.

We explore these supply and demand factors below.

Supply: where does silver come from

Total supply!

Between 2010 and 2021, mining companies produced 310,000 tonnes of silver, while gold production totaled almost 40,000 tonnes. Changes in production levels for both metals can be seen in the chart below, with 7.8 times more silver mined over the time period.

Gold and silver production (tonnes) – 2010 to 2021

Source: ABC Bullion, World Silver Surveys, World Gold Council

Total silver production grew by just 9% over this time period, though by the end of 2021, production levels had fallen 9% below their peak, which was hit in 2016, when almost 28,000 tonnes of silver were mined.

By contrast gold production was 26% higher in 2021 compared to 2010, with production of almost 3,600 tonnes in 2021 just 2% below the all-time high seen in any calendar year, which was 2018.

Where is the silver mined?

While silver is mined all over the world, Mexico is by far the largest producer. In 2021, it produced 6,118 tonnes of silver (almost 200 million ounces), which was just shy of 25% of total global production.

The only other countries that produce more than 100 million ounces per annum are China and Peru, with these three countries accounting for just over 50% of total mined silver production in 2021.

In this regard, silver mining is more concentrated than gold is, as the below table highlights, with the largest 5 countries by mining production accounting for 61% of total silver mining output, versus just 38% for gold.

Australia and China are the only two countries that are in the ‘Top 5’ for both precious metals.

Source: ABC Bullion, World Silver Surveys, World Gold Council

Silver is a by-product!

Another key difference between gold and silver supply is that most of the silver that is produced in the world is actually a by-product from mines targeting other metals.
The 2022 World Silver Survey suggests 72% of mined silver production came from lead-zinc, copper and gold mines. That’s not the case with gold, which is typically the main metal companies are focusing on when trying to put a mine into production.

Demand: who buys silver?

Like gold, silver attracts investment from those looking to

• hedge inflation risk

• protect their portfolio when equity markets decline

• own an asset that can deliver strong long-term returns

People also buy silver in jewellery form, where it acts as both a display and store of wealth, just like they do with gold.

Where silver differs from gold is that as a share of total demand, the investment and jewellery component is far smaller, with a much larger share of total silver demand driven by its varied industrial uses.

This can be seen in the chart below, which shows the share of total demand for both gold and silver that comes from investment and jewellery demand.

Chart: Investment and Jewellery demand as a percentage of total demand

Source: World Gold Council, World Silver Survey

Since 2013, investment and jewellery demand has averaged 42% of total silver demand. For gold the number has been 81%.

This is part of the reason silver is typically more volatile, but also potentially more profitable than gold is.

Demand – China vs America

China, India, Germany and the United States are all important sources of physical demand for both gold and silver bars and coins. This can be seen in the table below, which highlights the share of total global demand for gold bars and coins attributed to each nation.

Table: Share of total bar and coin demand – 2012 to 2021

Source: World Gold Council, World Silver Survey

The big difference between the two precious metals is between China and the United States. Investors in China are the largest buyers of gold bars and coins (26% of total demand since 2012) but the smallest silver buyers (5% of total).

In the United States, the situation is reversed, with silver buyers there accounting for just 6% of private sector gold bar and coin demand, but a staggering 38% of total silver demand.

Demand outlook for silver

Going forward, we think the outlook for silver is solid, with multiple drivers supporting demand, including

• The macroeconomic and investment environment (higher inflation, lower growth, and greater stock market volatility) supports higher precious metals allocations

• Silver is historically cheap relative to gold, as per this article on the gold-silver ratio

• Silver often outperforms gold in precious metal bull markets

• Silver is set to benefit from ‘green initiatives’ including vehicle electrification

This last point was specifically referred to in the 2022 World Silver Survey, which noted;

Silver demand is forecast to post steady gains in the next few years to successive record highs. Industrial demand for instance is expected to see initial gains as economies continue to recover from the pandemic and through structural change.
A good example of that is the electrification of vehicles; both hybrids and even more so battery electric vehicles have higher silver loadings than internal combustion engine equivalents and so this shift will drive rapid silver demand growth. Offtake in the current leader for green economy silver uses, photovoltaic demand, should also see modest gains.

Conclusion

As this article highlights, while there are some similarities between gold and silver in terms of supply and demand, there are also some key differences.
Silver is far more driven by industrial demand than gold is, while physical bar and coin demand is more heavily influenced by buying in Europe and North America, compared to gold bar and coin buying, which is driven more by China and India.

On the supply side, silver is circa eight times more plentiful than gold in terms of the average amount that is mined in any given year, but this supply is predominantly sourced as a by-product of mines whose primary purpose is to produce copper, zinc, lead or even gold.

These differences in the supply and demand drivers help explain some of the performance differences between the two precious metals, with gold the less volatile of the two, and the more reliable stock market hedge, while silver is the one that typically exhibits very profitable bull market runs that dwarf the gains gold investors enjoy.

This doesn’t make one better than the other.

Rather it highlights that silver tends to play a different role in a portfolio compared to gold, with both potentially acting as valuable assets in a diversified investment portfolio.

Warm regards,

The ABC Bullion Team

Disclaimer: This document has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this document or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it. Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, ABC and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances. To the extent possible, ABC, its associated entities, and any of its or their officers, employees and agents accepts no liability for any loss or damage relating to any use or reliance on the information in this document. It is intended for the use of ABC clients and may not be distributed or reproduced without consent. © Australian Bullion Company (NSW) Pty Limited 2020.