Metals Focus: "Only Continued (Silver) Drawdowns From Above-Ground Stocks Can Balance Market"
Plus: What might End Gold's Bull Run
Housekeeping: Recently Metals Focus analyzed the ongoing Silver supply deficit which was covered here for premium subscribers. Today, Chris Marcus of Arcadia Economics gives his own take on the situation as a longtime Silver and mining expert on this topic. What might end Gold's Bull Run at bottom.
Metals Focus: "Only Continued (Silver) Drawdowns From Above-Ground Stocks Can Balance Market"
By Chris Marcus for Arcadia Economics
Last week Metals Focus released a note about the ongoing deficit in the silver market, and they mentioned that at this point "only continued drawdowns from above-ground stocks can balance the market in the next few years."
Metals Focus is the group that compiles the data for The Silver Institute's World Silver Survey, and they report the silver market being in a deficit for the past 5 years (5 years if the ETF flows are accounted for in the net balance, 3 years if they aren't), with another large deficit forecast for 2024.
(courtesy of The Silver Institute)
Over the past few years we've talked with analysts, miners, and traders to see if there's any relief on the horizon towards the current imbalance, which at times has been funded by depletion of above-ground stockpiles.
But with the silver mining industry still just starting to recover from a harsh 2-year bear market, while much of the junior side of the market still has yet to see any significant investment inflows, the Metals Focus report confirms what we've been warning about.
"The silver market is experiencing its fourth consecutive year of structural deficit, driven primarily by increasing industrial demand. This deficit is expected to persist and so notably deplete above-ground stocks. A critical question now facing the market is whether mine supply can respond to restore balance."
Metals Focus also notes how after 2 decades of consistent year-on-year production growth, during which the silver price averaged $13.30 per ounce, silver mine supply peaked at 900 million ounces in 2016.
Yet the level of silver production has been falling in the years since, and the 2024 forecast calls for only 823 million ounces mined, despite the price now being over $31.
"Looking ahead, the structural deficits are expected to support silver prices, which are forecast to ultimately reach record highs over the next five years.
However, mine supply growth is likely to remain modest, with only minimal increases globally."
Metals Focus also noted how the majority of the silver mined comes as a by-product from non-primary silver producers that are mining copper, lead, zinc, and gold. Which means that even an increase in the silver price has a limited impact on the overall production.
Additionally, grades have fallen by 22% over the past decade, while costs of energy and labor have risen substantially, permitting times have lagged, and government/jurisdiction risk has increased.
"In addition, escalating ESG constraints, persistent community opposition, and ongoing cost inflation and procurement challenges related to mine development have intensified the risks associated with bringing new mines into operation. Some management teams will prefer to pursue growth through mergers and acquisitions (M&A) rather than new mine developments."
Lastly, as we have talked about often, another issue is the timing.
As even if the price went to $50 or $100 tomorrow, and assuming that capital allocators felt that it was going to stay there and not drop back down, there's still a significant time lag. One that can take anywhere from 5-15 years to get new projects permitted, developed, and into production.
"The timing of new supply will be critical, as developing a mine takes many years. This means that it is implausible that new production could balance the current deficits over the short to medium term. For those shortfalls to end, we are instead dependent on recycling and demand to react to the forecast price rally. This would come soonest in the price-sensitive areas (mainly jewelry and silverware).
However, we also need that to happen to retail investment (which may not immediately occur should investors buy into the rally, rather than profit take) and to industrial demand through thrifting and substitution (which itself can take a year or two as products are redesigned and recertified). As such, it is only continued drawdowns from above-ground stocks that can balance the market in the next few years.”
Keep in mind that the data Metals Focus provides for The Silver Institute's World Silver Survey is routinely cited by the banks. Who send out their research reports to their institutional clients.
Which means that this message about the current silver supply and demand profile is now continuing to reach the larger corners of the investment world.
Chris Marcus for Arcadia Economics
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Premium: What Might End Gold’s Bull Run
MUFG Commodities Weekly Cautions against emerging obstacles to the Gold Bull market
Notwithstanding the structural resilient bull market in gold, we assess what potential factors with sufficient influence may bring an end to gold’s constructive narrative. We highlight four dimensions that may at least restrain upside – if not generate a bearish reversal.
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