Posted on December 07, 2022
We have been covering the shortage in silver over the last four years in recent articles, and this story will be a continuation on that theme. More than that, it serves as a prediction for what could happen in 2023 if current trends continue unabated.
We define shortages as more demand than supply, at current levels. We aren’t yet declaring the world has run out of silver, or that this outcome is imminent. However, it sure as heck seems that the silver stockpiles are falling precipitously. See this chart from the Silver Institute, with data provided by Metals Focus.
We know that for the last four years, the market has demanded a substantial amount of silver more than what the mining outfits were capable of producing each year. And according to new data recently released, the deficit has already widened more than they originally predicted for this year. The chart from the Silver Institute’s Interim Market Report revises 2022 shortages to a whopping 194 million ounces!
That sure sounds like a shortage, though we do have stockpiles to offset them. These stockpiles will last for a while, but not forever. The following chart documents the runoff in silver inventories already in 2022.
We clearly see that the world is demanding more silver than we ever have. And that the mines are not keeping up with supply across a now 5-year trend. The question for silver investors is when will the market realize shortages are coming, and we get a ‘re-rating’ on price in the trading markets. That is the trillion-dollar market question and not an easy one to answer.
It is impossible to know ahead of time when the market will catch on to a budding story. And while the market fundamentals have been clear for years now, it likely won’t be until a big manufacturer complains about the lack of silver that the news will reach the mainstream financial media.
This is because precious metals are not on their radar as an everyday asset class. Conventional financial wisdom is that stocks, bonds, and real estate are the primary investor classes. Gold and silver are commodities, despite their 5000-year track record as money. But silver, in particular, has largely become THE most important of the industrial commodities needed for everyday modern life.
Add in that commodities are only viewed as a ‘contrarian’ investment to be paid attention to as a less respected alternative when the rest of the markets are down. After all, the rest of the popular investment classes are simply derivatives of real value, represented by gold and silver. See Exter’s pyramid for how this works.
What the last couple of years has shown us is that the last bull market, dating back to 2009-2010, will not last forever. The easy money policies of the world’s central banks now have to be accounted for. Natural economic law is going to force the issue whether the markets want the party to end or not.
History has shown time and time again that commodities are the way to go during and after a recession, as economic re-alignment and growth are needed to recover from the crash. Therefore, I expect a big commodities boom heading out of the current financial crisis which may last for several years.
In the meantime, gold and silver are just now starting to emerge again as legitimate safe haven alternatives. The mainstream banks are starting to speak positively about gold on a possible Fed pivot in monetary policy. Per Francisco Blanch, Commodity Strategy team at Bank of America:
“The commodity strategy team at Bank of America, led by Francisco Blanch, thinks gold has further to go. In a comprehensive 2023 commodity outlook note recently released, BofA says the price could exceed $2,000 an ounce next year as of all the precious metals “gold has the most to gain…on a Fed pivot”.
“With relatively limited commercial uses, gold has always been driven by investor demand,” says BofA. And that demand in turn tends to be impacted by borrowing costs and the dollar, in which gold is denominated.
Thus: “A pivot away from the aggressive rate hikes through 2023 should bring new buyers back into the market.”
They also predict $25 silver during the second half of 2023. Saxo is predicting economic factors could push gold to $3000 in 2023. However, the bearish sentiment still exists for both metals in 2023 upon fears of an economic downturn.
Expert opinions on gold and silver are mixed. While the fundamentals for silver supply and demand are very strong, we can see the market is not quite yet on the silver bullet train. Some are looking up ticket prices, and for sure we see an analyst or two hanging around the train station. But very few have joined the silver bulls on the precious metals journey.
We think that all changes in 2023 because the real physical shortages will become too pronounced for analysts and traders to ignore anymore, as well as increased pressure in the financial system, will force analysts to look at alternatives to stocks, bonds, and real estate for finding positive returns.
I absolutely love silver, and ‘junk silver’, which refers to pre-1964 minted US circulation coins, is one of my favorite investments in the space. The fact that they are government issue coins is a huge benefit to buying junk silver because you know people will recognize them. They also offer silver in fractional ounce amounts which I believe will become very important as the silver shortage worsens and silver prices rise substantially. Having small denomination silver in your inventory could be the perfect solution when you just need something recognizable and easy to trade for everyday purposes. Plus, I expect premiums on this kind of silver to rise substantially as the shortages become more common knowledge, offering the investor handsome potential on the upside.