Silver Shines, Powered by Sun

Sizzling silver shining and jewellery demand accounts for just a sliver of its appeal. It’s elementary, my dear (aka elemental properties of silver are boosting it’s appeal and prices). Silver is considered one of the most conductive elements as heat and electricity flow through it quite easily. This makes it the darling of sunrise sectors like electronics, solar and electric vehicle industry. Add a pinch of geopolitical tensions, prospects of rate cuts and silver becomes a tantalizing cocktail for investors.

In the past two years, silver prices on COMEX have increased from $19/Troy Ounce to above $29/Troy Ounce. Simply put, it’s due to current demand-supply dynamics where demand has exceeded supply. On top of it, future demand prospects also pose a compelling picture. Let’s start with current demand-supply dynamics and then we will gaze at the future. As per the Silver Institute, global silver demand has exceeded supply each year since 2021. Even in 2024, it is estimated that demand will exceed supply by 215 million ounces.

On the supply side, mine closures and strikes were major culprits for curtailed production. Meanwhile, the rise of green energy and the emergence of AI are major drivers for silver’s industrial demand. Not to forget that macro factors like interest rates, inflation, and geopolitics are also acting as tailwinds for silver’s investment demand.

Amidst all this, jewellery demand for silver hit a record high in 2022 but then declined 13% in 2023. The major demand decline can be attributed to India where destocking (selling already existing inventory) and rupee depreciation were the main drivers behind this fall. This year, silver made a record high as its price on MCX went above Rs 96,000 per kg. This hinders revival in jewellery demand.

Industrial demand infusing glitter to silver’s allure

Silver’s global industrial demand stood at 1,195 million ounces in 2023. Out of this, total industrial demand was 654 million ounces. Within that, electrical and electronics accounted for 445.1 million ounces. In it, photovoltaics deserve a special mention as their demand for silver increased 64% from 118.1 million ounces in 2022 to 193.5 million ounces in 2023.

Since silver is one of the most conductive elements, heat and electricity can easily pass through it with minimal resistance. In photovoltaic cells, it is used to convert sunlight into electricity. At the dawn of this century, governments across the world provided ample subsidies for solar energy production and that induced higher demand for silver. This also led to overproduction of solar PVs.

However, post GFC (Global Financial Crises 2008), subsidies reduced, silver prices shot up and this propelled thrifting in the solar industry. Thrifting is a process of reducing reliance on silver. In essence, the development of efficient technology and production processes means a solar cell needs 80% less silver than a decade ago. Despite all this, silver demand from the solar industry has witnessed a consistent increase.

Still, the thrifting process took time and the post-GFC environment was not conducive for the European solar industry. This harmed European solar companies that previously went into an overproduction spree on the back of government subsidies. As they continued to struggle, China gained its foothold in the solar industry and is currently dominating it. Cheap Chinese solar panels flooded the European market, nudging European companies to the verge of bankruptcy. In response, the ESMC (European Solar Manufacturing Council) has urged the government to curtail cheap imports. The request has faced pushback from other industries that use Chinese imports as raw materials.

IEA (International Energy Agency) noted that in the past decade, China has invested $50 Bn in solar photovoltaics (PV). As China realized the strategic importance of the solar industry, it invested heavily and took advantage of its mammoth interconnected manufacturing ecosystem. This incentivized innovation across the solar PV value chain. Resulting in higher efficiency, lower prices and China attaining 80% market share in the global solar panel industry.

Since China is dominating the solar industry and silver demand depends heavily on the solar sector, China plays an important role in driving silver prices. Nevertheless, the story doesn’t end here. Silver is a critical raw material even for other emerging industries such as electric vehicles and semiconductors. There too, China plays a pivotal role.

Chips are new space race

During cold war, US engaged Russia in space race to exhaust its resources, currently semiconductor chips have a similar form where US is engaging with China. US-China tussle is propelled by forces of power transition. US is global hegemon and China is challenger, so US will try it’s best to prevent China’s rise. No matter who becomes US president, this ruckus will continue. It’s just that Trump’s return will increase the element of uncertainty.

Currently 5 nano meter (nm) and sub 5nm semi-conductors are at the forefront of technology frontiers. They are used in most advanced applications like Artificial Intelligence (AI). US is leading it but China is close behind. China’s economy has grown rapidly due to catch up effect (It operationalized already existing technologies on huge scale). At the moment, China has done most of the catchup and it is close to technology frontier. So, Uncle Sam (US) would like to stay ahead of the curve and prevent the dragon (China) from doing so. Hence all the restrictions are being imposed on China. Still, there is buzz that China has produced 5nm semiconductor.

Although lower nm chips are used in leading technologies like AI, higher nm chips (10nm and above) are generally used in various products like electric vehicles (EV), mobile phones, refrigerators etc. China Blitzkrieged (went all guns blazing) in lower grade semiconductor and as per The Economist, by 2027 China is expected to account for 40% market share in transistor size of 28nm and above. China also has geostrategic advantage in semiconductor industry because Chinese lands are hub of rare earth elements. Whole rare earth element supply chain is under the wings of dragon. Rare earth elements are crucial raw materials for semiconductors. Since silver is also a critical component for semiconductor, it’s demand is interwoven with all this geopolitics.

Geopolitical upheaval paving path for silver

Another realm where fates of silver and geopolitics intersect is electric vehicles. It is reported that 25-50 gm silver is used in an electric vehicles. Just like other industries, China provided various incentives for development of EV industry and as a consequence China developed high quality, low cost EVs. They are giving tough competition to companies like Tesla. Even Tesla CEO Elon Musk is concerned that in absence of trade barriers, Chinese EVs would demolish rivals. So, it shouldn’t come as a surprise that US imposed 100% tariffs on Chinese EVs.

China is finding ways to bypass this, BYD (Biggest Chinese EV company) is looking to set up plant in Mexico which can become launch pad for entering US markets. Here too geopolitics will play an important role. In recently held presidential elections, Mexico’s ruling part Morena got super majority in lower house. Even in upper house it is very close to attaining super majority. In recent times Mexico has emerged as an attractive investment destination due to its close proximity with US. Morena might take populist measures that would promote domestic companies at the cost of foreign firms. This may reduce its attraction and investment climate in Mexico could become less favourable.

Chinese EVs are looking to gain market share in broader Latin American region as well as in Europe. There too path is filled with hurdles. Europe will impose up to 48% tariffs on Chinese EV.

This brings us to broader geopolitical dynamics where EV is just a one component. Overall geopolitical tensions also impact silver prices because silver is seen as safe haven during turbulent times. Currently, Europe is becoming hotspot for political activities. Recently held EU elections witnessed rise of right wing in Europe. In Germany, France, Italy right wing parties dominated the elections.

This even prompted French President Emmanuel Macron to call for snap elections. Polls indicate that Marine Le Pen’s far right part RN (National Rally) is leading. Marine Le Pen is considered as pro Putin. So, her rise to prominence will further complicate Russia-Ukraine war. Another right-wing figure that has become quite influential in European politics is Italian prime minister Georgia Meloni. Her party, European Conservatives and Reformist won 83 seats out 720 in EU elections and now she is being considered as a king maker.

Europe is currently at cross roads with 3 paths ahead

1) Inertia (Same status quo),

Currently, Europe is seen as an extension of the US and Western front.  Europe is not very happy with this, but it might continue on that path. Europe is beset by issues like aging population, less impetus on innovation & competition as well as internal conflicts among member states. These headwinds may restrain any kind of change, implying that Europe and US will consider China a common threat and will act in tandem against the rise of Dragon.

2) Strategic autonomy but more global influence.

In this, Europe will try to become a power centre on its own and increase its global influence while moving away from US. This can lead to comparatively friendlier relations with China. Under this scenario, Europe will become the core battleground in the US-China tussle. As both countries will try to tap European nations and EU as a whole in their camp. This might also imply that Europe will focus more on innovation, technology and reigniting the adventurous European spirit that made European countries a powerhouse during the medieval period. French president Macron seems to be a major proponent of this route.

3) Strategic autonomy with inward looking focus.

The rise of the right wing in Europe suggests such a trend. In this case, Europe will further seek to restrict immigration and globalization while focusing on reshoring within the continent. All this may accelerate the trends of decoupling and deglobalization. Europe may also engage in a trade war with both the US and China.

Currently, Europe is trying to traverse between the 2nd and 3rd scenarios. In such a case Georgia Meloni will become a prominent figure because she is considered a right wing but a pragmatist. Ursula von der Leyen may look to work closely with Meloni, suggesting that Europe will have the combined characteristics of both 2nd and 3rd scenario. EU will impose protectionist measures on China but they will be less severe as compared to US. EU will put itself 1st but will take pragmatic approach towards both China and US. For diversifying its bet, EU will try to create strong relations with India and global south. In the rise of Europe, immigration policies and ageing population will act as friction but pragmatism (If depicted) will act as lubricant.

Innate fundamental value of precious metals

During times of uncertainty or tensions, precious metals are considered safe haven. It is because the value other asset classes like stocks, currencies and bonds depend upon underlying fundamentals of economy and company. Meanwhile precious metals also have their innate fundamental value. Innate value of precious metals comes due to following factors:

a) Aesthetic Value: Precious metals like gold and silver are pleasing to look at. This pleasant sense perception elicits positive emotions which makes it valuable.

b) Scarcity Value: Precious metals are also scarce and this scarcity principle also increase the value.

c) Social Status Value: Combination of aesthetics and scarcity make it quite valuable and owning precious metals gives you high social status.

Due to these reasons, precious metals were used as store of wealth and money since time immemorial. Such historical significance further contributes to the innate value precious metals.

Since current geopolitical environment is filled with uncertainties, the safe haven demand for precious metals is expected to remain strong.

Protection against inflation

When inflation rate in the economy is high, the purchasing power of consumer, corporates decrease. This creates unfavourable dynamics for companies that lack pricing power and for economy in general. As a consequence, equities become less attractive. Here precious metals come to aid because they are hedge against inflation. During inflationary times, prices of precious metals also appreciate in line with general price levels.

Meanwhile, prospects of lower interest rates also entice investors towards precious metal because interest yielding government bonds become less attractive.

Currently, disinflation across the globe is happening at a slower pace than expected. COVID-induced supply chain disruptions (Movement restrictions, lower sentiment, higher commodity prices) paved the way for low economic growth and higher inflation (Stagflation in technical terms as aggregate supply curve shifted inwards).

Now, with normalization of these issues, inflation has started subsiding. Growth and inflation are again being driven by money supply & economic slack (Distance between actual economic performance and potential production frontier). GDP in most developed economies is close to its potential and that’s why developed economies witnessed secular stagnation (meagre economic growth) post-2008 GFC.

However, currently, total money supply (M2) is much higher for developed economies than it was in 2019. That’s why inflation is above pre-covid levels. Given that central banks are looking to cut interest rates from here on, we can assume money supply will at least remain at elevated levels.

For assessing inflation and growth trajectory from here on, we need to look at factors determining production frontier (capital investment, labor force and efficiency level). Capital investment and labor force in turn would be determined by social and political factors (demographic dividend and stance on immigration).

Given the geopolitical tensions, investment climate may remain subdued as investors will prefer clarity on these fronts before making huge capital investments. Following geopolitical tensions are foremost (a) US-China trade war, b) EU’s relations with US, China, India, UK, c) 2 wars. If uncertainty on these fronts prevails. Then capital investment will remain muted because investors and MNCs will like to go for friend shoring but it might be difficult to assess who exactly is a friend of whom.

All this implies a slower expansion of the production frontier and secular stagnation may continue. This may accelerate the global rise of right wing because in times of stagnation, open market economy and foreigners often become scapegoats.

On the other hand, Gen AI is booming and it can trigger new wave of efficiency. Even though it is still in the nascent stage, as more and more businesses understand how exactly they can incorporate Gen AI within their business model, the production frontier will shoot off.

We need to carefully assess this tug of war. If Gen AI will boom quickly then it will be a cause and as an effect, the global economic situation will improve. This in turn might also reduce political and social tensions. In contrast, if geopolitical tensions will gain the upper hand, then even AI tech boom will get engulfed in geopolitical battles (Restrictions on development on sub 5nm chips is perfect example of this).

In either case, silver seems to have positive outlook. Industrial growth will propel the industrial demand for and geopolitical tensions will pivot safe have demand for silver.