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The price of silver has been rallying this year, even outperforming gold at times. Daniel Ghali, Senior Commodity Strategist with TD Securities, discusses global demand trends and why the price of the metal could continue to climb.
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While many investors have been watching the run higher in gold this year, silver has had an even better run. Joining us now to discuss what's driving this move that we're seeing right there and whether it could continue, Daniel Ghali, senior commodities strategist with TD Securities. Quite a telling chart we showed the audience there, in terms of what we've seen in gold, which has gotten a lot of headlines, but silver too. What is driving this rally in silver?
Yeah, absolutely. I mean, silver has had an incredible run so far, year-to-date. And frankly, I think that silver's fundamentals are among the most exciting in the commodities complex today. This is a market that has been in a deficit for at least three years, that most analysts around the world foresee will continue to be in a structural deficit for the foreseeable future. And really, over the last decade or so, nobody's really cared.
Nobody's really cared about supply-demand fundamentals because there is this huge stockpile of metal that was always sufficiently large enough to accommodate any gap in the physical supply-demand balances. That's the assumption I think is going to be challenged over the next year or two.
And that's a result really of the energy transition theme. Solar is demanding more silver and, the EV boom is also demanding more silver as a result of the increasing use of electronics in vehicles. So this is a great demand story, a constrained-supply story, and really an exciting market.
Is that what changed the story? You said, for a decade, nobody cared that we had this structural deficit. And suddenly, it seems that the market woke up to it. Is it really about these energy transitions saying, wait a minute, silver is going to be pretty key to all this?
I mean, partly. Certainly, this is a strong precious-metals environment. Gold prices have performed quite well. And so you would expect that silver prices do perform quite well in that environment as well. But what's particularly interesting about silver's fundamentals currently is that this inventory picture that we've been discussing is starting to change.
Over the last decade, you'd had about 1.6 billion ounces of silver sitting in vaults across the world. And when we analyze that picture today, what we find is that there's probably a substantial amount of the silver that is remaining on those vaults, that has been eroded or otherwise captured by ETF holders, for example.
And so, in turn, the amount of silver that is actually freely available for purchase in the world's largest bullion market vaulting system in London is substantially smaller than that. We're talking about, by our estimates, somewhere around 300 million ounces that are actually available for purchase in the context of an average deficit of around 200 million over the last three years. So there's really not that much time remaining before those inventories are going to be fully depleted.
That sets up a really interesting tension. Because we think about gold being held in vaults for a reason, and there's a role for it to play in the financial system. Silver, often called the poor man's gold. But if people actually want that silver to put it into things, that's a really interesting tension that I hadn't thought about.
Yeah, definitely. I mean, over the last 10 years, people look at silver as a financial asset, similar to gold. But silver's demand profile is overwhelmingly driven by the industrial side. It typically is characterized by a substantial amount in fabrication demand. These are things that could go into jewelry, silverware, industrial applications as well.
But the boom that we've seen on the demand side is really being driven by the energy transition. And so silver is increasingly being disconnected from gold, or at least we think that it will, as a result of that.
Now, you talked about the supply side, briefly. Obviously, if we're going to have this demand for silver as we transition, and we want to actually get our hands on more of it, what about the mining situation? I mean, is the industry responding to that? And they can't respond overnight.
Yeah, absolutely. I mean, we've spent a lot of time talking about the structural underinvestment in mining and metals and other carbon-intensive industry that has occurred over the last decade. Silver is primarily mined as a byproduct of other mining activities. So lead and zinc mines will produce some silver. Gold mines will produce some silver. But there isn't that much silver that is mined from an actual silver mine.
And the implication here is that the structural underinvestment on the mining side that we've spoken about for copper, for example, is also impacting silver supply.
Does this set us up for a squeeze situation?
We do think that we're in an environment where a squeeze on silver is plausible. And that relates to the fact that the LBMA's vault-- being the world's largest, it contains about 75% of the world's visible silver inventories-- are being drawn down. They're being drawn down, in part, by the strong demand-side coming from the energy transition theme, as we've been discussing, but also by a significant shift or movement of metal from the West to the East, namely towards India and China.
OK, let's pull up that chart again that we started off in the beginning showing gold and silver versus gold. This is the way it's run. Fair enough, got a lot of attention. What are we seeing here? I mean, the fact that silver outperforming gold, I think that might take some people by surprise.
Well, actually, it's quite common for silver to outperform gold, simply on the basis of its volatility. If you were to volatility-adjust the performance of these two assets, you would actually find that it's only in very recent weeks and months has silver actually started to outperform gold.
But typically, silver has a volatility that's at least twice the scale that gold has. And so as gold prices move 1%, you would expect a larger movement in silver prices.
Now, gold had the big run, did pull back a little bit from that big run. People I've talked to said they wouldn't be surprised to see a pullback, and then we saw the pullback. What about silver? I mean, is the run poised to continue here, in the shor and medium term, or could we see a pullback?
Well, here's what's interesting about the price action recently. Silver is currently trading near multi-year highs, whereas gold has experienced the pullback, as you mentioned. And that actually underscores a pretty significant amount of strength in how it's trading. The fact that the drawdown in gold hasn't pulled silver lower tells you that there's something brewing on the physical side in silver, or on the demand side, more broadly, in silver.
We think that, potentially, this is associated with strong demand out of China. We have seen some signs of a rotation in retail trade or activity away from the very significant amount that we saw in gold during the month of April and rotating potentially towards silver today.
But also because China's solar installations are really beating expectations. Last year was a hallmark year for China's solar capacity growth. And the expectation for this year is that, in the best-case scenario, they could only match what they did last year. But the tracking so far this year has been incredibly impressive. And so it does look like physical demand for silver in China is very strong.
Yeah, it sounds like we have a pretty good handle on the fundamental reasons for this silver rally. I think in my last discussion with you and with Bart Melek, one of your colleagues too, there was the word "mystery," the mystery buyer in gold. I mean, we sort of figured that out. Was that essentially the central banks?
Partly we think it could be associated with central banks or other official-sector buying activity. I think the piece that is really worth mentioning on precious metals today is that they are morphing into a currency depreciation hedge. We have to consider that markets are global in nature. And currently, there is a pretty acute pressure on Asian currencies that is incentivizing institutions, retail investors, and indeed their governments to diversify away from currencies that are depreciating. And gold is benefiting from that.
Now, before we leave this conversation, we did see the run-up in gold, the pullback in gold. Is there a risk here for silver?
Actually, we think the risk is pretty limited. And we say that-- of course, there is a risk, but the risk is limited because the margin of safety against substantial investor liquidations we think is pretty elevated. So it will take a large drawdown in prices before investors really feel the pain point and are forced to liquidate. And really, the strength that we're seeing on the demand side is coming from physical markets. So it does seem to us like the setup right now is pretty solid.
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While many investors have been watching the run higher in gold this year, silver has had an even better run. Joining us now to discuss what's driving this move that we're seeing right there and whether it could continue, Daniel Ghali, senior commodities strategist with TD Securities. Quite a telling chart we showed the audience there, in terms of what we've seen in gold, which has gotten a lot of headlines, but silver too. What is driving this rally in silver?
Yeah, absolutely. I mean, silver has had an incredible run so far, year-to-date. And frankly, I think that silver's fundamentals are among the most exciting in the commodities complex today. This is a market that has been in a deficit for at least three years, that most analysts around the world foresee will continue to be in a structural deficit for the foreseeable future. And really, over the last decade or so, nobody's really cared.
Nobody's really cared about supply-demand fundamentals because there is this huge stockpile of metal that was always sufficiently large enough to accommodate any gap in the physical supply-demand balances. That's the assumption I think is going to be challenged over the next year or two.
And that's a result really of the energy transition theme. Solar is demanding more silver and, the EV boom is also demanding more silver as a result of the increasing use of electronics in vehicles. So this is a great demand story, a constrained-supply story, and really an exciting market.
Is that what changed the story? You said, for a decade, nobody cared that we had this structural deficit. And suddenly, it seems that the market woke up to it. Is it really about these energy transitions saying, wait a minute, silver is going to be pretty key to all this?
I mean, partly. Certainly, this is a strong precious-metals environment. Gold prices have performed quite well. And so you would expect that silver prices do perform quite well in that environment as well. But what's particularly interesting about silver's fundamentals currently is that this inventory picture that we've been discussing is starting to change.
Over the last decade, you'd had about 1.6 billion ounces of silver sitting in vaults across the world. And when we analyze that picture today, what we find is that there's probably a substantial amount of the silver that is remaining on those vaults, that has been eroded or otherwise captured by ETF holders, for example.
And so, in turn, the amount of silver that is actually freely available for purchase in the world's largest bullion market vaulting system in London is substantially smaller than that. We're talking about, by our estimates, somewhere around 300 million ounces that are actually available for purchase in the context of an average deficit of around 200 million over the last three years. So there's really not that much time remaining before those inventories are going to be fully depleted.
That sets up a really interesting tension. Because we think about gold being held in vaults for a reason, and there's a role for it to play in the financial system. Silver, often called the poor man's gold. But if people actually want that silver to put it into things, that's a really interesting tension that I hadn't thought about.
Yeah, definitely. I mean, over the last 10 years, people look at silver as a financial asset, similar to gold. But silver's demand profile is overwhelmingly driven by the industrial side. It typically is characterized by a substantial amount in fabrication demand. These are things that could go into jewelry, silverware, industrial applications as well.
But the boom that we've seen on the demand side is really being driven by the energy transition. And so silver is increasingly being disconnected from gold, or at least we think that it will, as a result of that.
Now, you talked about the supply side, briefly. Obviously, if we're going to have this demand for silver as we transition, and we want to actually get our hands on more of it, what about the mining situation? I mean, is the industry responding to that? And they can't respond overnight.
Yeah, absolutely. I mean, we've spent a lot of time talking about the structural underinvestment in mining and metals and other carbon-intensive industry that has occurred over the last decade. Silver is primarily mined as a byproduct of other mining activities. So lead and zinc mines will produce some silver. Gold mines will produce some silver. But there isn't that much silver that is mined from an actual silver mine.
And the implication here is that the structural underinvestment on the mining side that we've spoken about for copper, for example, is also impacting silver supply.
Does this set us up for a squeeze situation?
We do think that we're in an environment where a squeeze on silver is plausible. And that relates to the fact that the LBMA's vault-- being the world's largest, it contains about 75% of the world's visible silver inventories-- are being drawn down. They're being drawn down, in part, by the strong demand-side coming from the energy transition theme, as we've been discussing, but also by a significant shift or movement of metal from the West to the East, namely towards India and China.
OK, let's pull up that chart again that we started off in the beginning showing gold and silver versus gold. This is the way it's run. Fair enough, got a lot of attention. What are we seeing here? I mean, the fact that silver outperforming gold, I think that might take some people by surprise.
Well, actually, it's quite common for silver to outperform gold, simply on the basis of its volatility. If you were to volatility-adjust the performance of these two assets, you would actually find that it's only in very recent weeks and months has silver actually started to outperform gold.
But typically, silver has a volatility that's at least twice the scale that gold has. And so as gold prices move 1%, you would expect a larger movement in silver prices.
Now, gold had the big run, did pull back a little bit from that big run. People I've talked to said they wouldn't be surprised to see a pullback, and then we saw the pullback. What about silver? I mean, is the run poised to continue here, in the shor and medium term, or could we see a pullback?
Well, here's what's interesting about the price action recently. Silver is currently trading near multi-year highs, whereas gold has experienced the pullback, as you mentioned. And that actually underscores a pretty significant amount of strength in how it's trading. The fact that the drawdown in gold hasn't pulled silver lower tells you that there's something brewing on the physical side in silver, or on the demand side, more broadly, in silver.
We think that, potentially, this is associated with strong demand out of China. We have seen some signs of a rotation in retail trade or activity away from the very significant amount that we saw in gold during the month of April and rotating potentially towards silver today.
But also because China's solar installations are really beating expectations. Last year was a hallmark year for China's solar capacity growth. And the expectation for this year is that, in the best-case scenario, they could only match what they did last year. But the tracking so far this year has been incredibly impressive. And so it does look like physical demand for silver in China is very strong.
Yeah, it sounds like we have a pretty good handle on the fundamental reasons for this silver rally. I think in my last discussion with you and with Bart Melek, one of your colleagues too, there was the word "mystery," the mystery buyer in gold. I mean, we sort of figured that out. Was that essentially the central banks?
Partly we think it could be associated with central banks or other official-sector buying activity. I think the piece that is really worth mentioning on precious metals today is that they are morphing into a currency depreciation hedge. We have to consider that markets are global in nature. And currently, there is a pretty acute pressure on Asian currencies that is incentivizing institutions, retail investors, and indeed their governments to diversify away from currencies that are depreciating. And gold is benefiting from that.
Now, before we leave this conversation, we did see the run-up in gold, the pullback in gold. Is there a risk here for silver?
Actually, we think the risk is pretty limited. And we say that-- of course, there is a risk, but the risk is limited because the margin of safety against substantial investor liquidations we think is pretty elevated. So it will take a large drawdown in prices before investors really feel the pain point and are forced to liquidate. And really, the strength that we're seeing on the demand side is coming from physical markets. So it does seem to us like the setup right now is pretty solid.
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