Silver has much greater upside than other established metals on a 1-2 year view – if you like copper’s fundamentals, you will love silver

Summary

We forecast the silver price strengthening towards US$50 per ounce in the next 1-2 years (upside of nearly 70% relative to the spot price at US$30 per ounce at the time of writing). The reasons for this are as follows:

1. We forecast silver demand to grow at elevated rates, having been stagnant for the last 10-years (silver demand has grown 0.5% per annum over this time), this growth is driven by two unrelated segments:
   • i. clean energy (especially its use in photovoltaic solar panels which accounts for approximately 20% of total demand and is growing at 20-25% per annum); and
   • ii. investment demand in silver as a precious metal (coincident with increasing investor appetite for gold).
2. Silver supply is not keeping up with demand on account of the fact that the silver market has been in deficit since 2019 and mined silver is forecast to decline 1% in 2024 (notwithstanding higher prices and growing demand);
3. The supply of silver from mining is less price elastic than other metals, meaning supply is less responsive to high prices (this is because the majority of silver produced is mined as a by-product of other metals). This gives the silver cycle higher amplitude than metals such as gold and copper and makes it more susceptible to price spikes; and
4. The silver market is relatively small which further enhances its propensity to be ‘squeezed’ relative to more established metals (it is approximately 1/10 the size of the gold market and 1/7 the size of copper with it has double the annualised volatility of gold).

Our forecast is not without historical precedent. The silver price rose to these levels in both 1980 and 2011 (in nominal terms, or nearly $150 per ounce in real terms in January 1980).

We see additional upside in silver mining equities. This is driven by their inherent leverage (beta) to the silver bullion price. A commodity producer typically provides a beta of 2 to the commodity that it produces (i.e. if the commodity price moves by one unit, the equity price would be expected to move by two units on the basis that the operating margin expands by more than the movement in the commodity price). Silver mining equities also benefit from the fact that they are trading at a valuation discount to historic average levels and relative to their peers in the copper and gold mining sectors.

How is silver used?

Industrial uses are responsible for approximately 60% of total silver demand (with the remainder driven by investment as a ‘store of wealth’). By way of comparison, gold can only be described as a precious metal with industrial uses accounting for less than 10% of demand.

Silver’s unique properties make it invaluable in a variety of applications from water purification to medical devices to precision electronics. We refer to silver as ‘specialty copper’ on the basis that copper is substituted for silver where its superior electrical conductivity properties are necessitated (silver is approximately 7% more conductive than copper and roughly 80 times more expensive for the equivalent weight).

Where we see real potential for silver demand growth is its use in various clean energy technologies. For example, silver’s use in photovoltaic solar cells and electric vehicles, which we believe is driving an upward structural shift in the metal’s intensity of use. For example:

• Roughly 10% of the cost of a solar module is silver and the silver intensity of solar technology is increasing (silver’s intensity of use in solar is increasing by roughly 30% and 100% in the move from PERC to TOPCon and Heterojunction cell technology, respectively – we forecast TOPCon to account for as much as 60% of solar cells sold in 2024); and
• Electric vehicles contain 2-3 times more silver than the equivalent vehicle with an internal combustion engine. Solar accounts for approximately 10-15% of industrial silver demand and electric vehicles around 5-10%, both growing at over 20% per annum.

The outlook for solar and electric vehicles

We forecast annual sales of solar modules to grow by 25% in 2024 which is a trend rate we expect to be sustained to the end of the decade and result in installed global capacity of approximately 6 terawatts by 2030 (or more than 4 times global installed capacity at the end of 2023 – in 2023 solar generated approximately 4% of global electricity).

While the global economy is slowing and electric vehicles sales will certainly not be immune, it doesn’t change the long-term outlook. Headlines including production cuts and delays from major established automakers (such as Ford, General Motors, Mercedez-Benz, and Volkswagen) and rental company Hertz choosing to sell 20,000 electric vehicles from its fleet have captured much attention. Notwithstanding these factors, the fundamentals indicate electric vehicle production and sales will increase materially in 2024. We forecast global electric vehicle sales will grow by approximately 20% in 2024 to 17 million units and account for 18% of total global vehicle sales.

The outlook for silver supply

Examination of silver’s supply side indicates that it is constrained (the silver market has been in deficit since 2019) and has some similar structural characteristics to copper (falling average grade of ore mined; falling ore reserve and resource grades).

Similar to copper and gold, approximately 80% of the world’s annual supply of silver is mined, with the balance coming from recycling (this has fluctuated in the range of 15-25% over the last 25 years). Of the silver produced by the mining industry, only approximately 30% is as a ‘primary’ product. Of the remainder, the majority (approximately 35%) is produced as a by-product from lead/zinc mines with the balance coming from gold (15-25%) and copper (10-20%).

This means that when silver prices are high, the high price has less influence incentivising new supply and when silver prices are low, mines are less likely reduce the supply of silver (silver has less supply elasticity to price than other metals). This gives the silver cycle higher amplitude than metals such as gold and copper, making it is much more susceptible to price spikes (and deeper troughs) and for these to be prolonged.

How high could the silver price spike?

Silver’s history has been punctuated by some extraordinary price spikes (1980, 2011) and we see the potential for the silver price to experience a similar squeeze on a 1-2 year time horizon (well above our base case upside driven by fundamental demand and supply). We consider the potential upside under this scenario to be far higher than commodities such as copper or gold on the basis of its relative market size (approximately US$36 billion annual revenue at spot price versus gold at US$360 billion and copper at US$260 billion) and technical characteristics (2 times and 40% higher annualised volatility than gold and copper respectively).

Silver and gold have been highly correlated, with a nearly 0.9 correlation over the last 10 years. Silver has a beta of approximately 1.5 to gold bullion. Silver and copper are also highly correlated, having had an approximately 0.8 correlation over the last 10 years.

Silver is trading nowhere near its all-time highs in either nominal terms (nearly US$50 per ounce in 1980 and 2011) or real terms (nearly $150 per ounce in January 1980). We add that these historic prices do not account for structural inflation factors (inflation not captured in government inflation data and inflation related to the cost of producing silver specifically, which increases structurally over time as grades mined fall and mines get deeper). Adjusting for these factors, we estimate the all-time high silver price in 2023 dollars (real terms) would be approximately US$200 per ounce (over 500% above the current spot price).

The gold/silver ratio is a renown technical indicator for the value of silver relative to gold to indicate relative value from a precious-metals-for-investment perspective and also indicates scope for a price spike. Silver is currently trading at a modest discount to its 20-year average ratio which, if holding the gold price constant, would imply 10-15% upside to the silver price. Using the ratio from the spike from 2011 would imply c.140% upside.

Consensus outlook

The forward price in 12 months is US$31 per ounce and the market consensus forecast is US$27 per ounce (and there isn’t a higher forecast than US$34 per ounce in the estimates used to compile consensus) relative to the spot price at approximately US$30 per ounce at the time of writing. This indicates that few in the market see potential for silver to do anything exciting. For us, this presents a compelling opportunity.

Why isn’t silver’s potential being recognised?

We observe that the general perception in relation to silver is that it is a precious metal (as opposed to metal with industrial uses) with less appeal than gold. Silver is often referred to as gold’s poorest cousin.

Silver’s true potential remains under the radar for the most part (unlike commodities such as copper). We believe this can be partly attributed to its absence from almost every government critical minerals list (i.e. silver is not included in the US Department of Energy or the US Geological Survey critical minerals lists). This is for good reason. Take commodities such as neodymium or praseodymium (typically referred to as ‘rare earths’) where nearly 70% of mined supply and approaching 90% of processing capacity is in China. This presents Chinese companies (or the Chinese State) extraordinary pricing power as well as potential strategic advantages (especially in the event of a conflict), which translates to significant economic and strategic vulnerability for western companies and nations. These factors (especially pricing power) mean a free market left to its own devices is unlikely to shift this balance without intervention. This makes rare earth elements a critical mineral. Silver on the other hand does not have these issues on the basis that its geological endowment and processing capacity is globally distributed. While silver’s omission from critical minerals lists is for understandable reasons, it is nevertheless vital to the energy transition and we believe this nuance is not widely appreciated by investors.

Finally, we reflect that silver has been getting over a 20-year hangover which has in part been responsible for silver being overlooked. The end of the of the film photography era has been responsible for a multi-decade slump in silver markets. At its peak in 2000, the film industry accounted for approximately 25% of silver demand and this has declined by nearly 90%. Such a material downward structural shift has been extremely disruptive to the supply side, resulting in more than two decades of under-investment in exploration, development and the supply chain. We believe this has also contributed to silver being ‘off-the-radar’.