Silver rally slows heading into summer, but demand outlook is bright

A recent silver rally has taken a breather, but the market could be ready to run again soon due to increasing industrial demand from sectors including solar panel manufacturers.

The price of silver reached a new high of just over $32 per ounce on May 29, up 33.7% since the start of the year after bouncing between $22 and $24 in January and February. Silver often tracks the price of gold, which has also made large strides and is expected to further increase this year. While the silver price has since cooled to just under $30/oz, high demand and low supply expectations could reignite the rally.

"I think the metals are just taking a breather," Maria Smirnova, senior portfolio manager and chief investment officer at Sprott Asset Management, said in an interview. "Usually, the months of June and July are kind of slower months, and then things pick up again towards August and September. ... Nothing goes up in a straight line."

In addition to a seasonal lull, the market is likely just digesting some of the recent gains, given that the silver price did rocket upward 43.3% in just three months as of May 29, Peter Krauth, a publisher at Silver Stock Investor and author of The Great Silver Bull, said in an interview.

"It's not that they were not deserved. It's just that they were very quick," Krauth said. "We may see $28 in silver, and we may even see it touch $26. Those are kind of my downside targets. I think that before long, probably by the end of the summer, early fall, by the time we're back into September, we're going to see silver start to climb back again."

Once the silver price crosses $30/oz and holds at those levels for a month or so, Krauth said that will become a new floor and the price will "continue to climb steadily from there."

A silver deficit

Silver's conductive properties make it indispensable in a range of applications where demand is rapidly increasing, including solar energy, electric vehicles and many other electronic devices. The Silver Institute, a trade group, projects that industrial use of the precious metal will climb 9% in 2024, and the segment already comprised 54.8% of total demand in 2023.

"I like to call it the Swiss Army knife of metals because it really has so many applications on the industrial side, and it's still considered money by many," Krauth said.

Solar panel consumption of silver skyrocketed in 2023, jumping 64% from 2022, according to the Silver Institute, and the association projects a further 20% increase in consumption from the industry in 2024.

The silver market was in a supply deficit for the third year in a row in 2023, with the Silver Institute projecting relatively high demand but fairly flat supply going forward. Silver's market deficit is expected to grow by 17% in 2024 while industrial demand is expected to grow by 9%, Smirnova wrote in a May 29 report. Since February 2021, silver held on the major exchanges has decreased by 480 million ounces, according to the report.

"If investors come back in a big way, there's less silver available for them versus what there was prior, so it could have even more leverage," Krauth said. "The investment aspect of silver demand is really a bit of a wild card. I think that the industrial demand is a lot more predictable."

Silver and gold

Silver has also been buoyed by gold's price rally, which has been driven in part by higher demand from China and India and a rush of central bank purchases since the start of the Russia-Ukraine war. So, while industrial demand grows, silver also benefits from safe-haven precious metal buying.

"One of the biggest drivers [in the silver rally] was the market seeing gold really be so resilient," Krauth said. "Despite the headwinds of sustained higher interest rates, the gold price remains high. I think that finally kind of bled into silver, and silver tends to follow gold."

The relationship between the two precious metals is so linked that many investors look to the ratio between the price of gold and silver to determine which metal to buy or sell in anticipation of the metals' values following one another. The reasoning is that when the ratio is higher, it is generally believed silver is undervalued, and when it becomes smaller, gold is undervalued. For example, GoldSilver, an online marketer of precious metal bullion, says that when the ratio tops 80, it signals a time when silver is relatively inexpensive compared to gold.

The ratio, based on London Bullion Market Association closing prices, was as high as 91.6 on Feb. 7 but dropped as low as 73.1 on May 29 when silver hit an all-time high. Between the start of the year and Feb. 29, just before the silver price began to rise, the ratio averaged 89.0.

Macroeconomics and geopolitics are likely to sporadically send the gold price over $2,500/oz in 2024, S&P Global Commodity Insights analyst Aude Marjolin said in a Commodity Briefing Service report published May 31.

"Keeping this in mind, we can expect some measure of profit-taking around midyear, which will pressure the gold price, even though the US dollar is likely to soften as the likelihood of a rate cut increases," Marjolin said.

Supply challenges

Despite high demand expectations from a variety of industrial and investment sources, few miners have plans to bring on new supply.

Low investor interest in the mining sector, along with silver miners pivoting to higher-margin gold assets, a shortage of resource discoveries, and long lead times in permitting and developing, have all slowed the development of new silver mines.

"When you've had a lack of money going into exploration — which means there's a lack of discoveries — you just can't come up with an extra 200 million ounces a year. It's very hard," Smirnova said. "We definitely don't have many [large silver mines] coming up in a hurry."

However, there could be an increase in silver production in the future. Silver, along with copper, contributed to an increase in drilling activity among metals explorers in May.