As we approach the final phase of 2023, now is a good opportunity to take stock of how silver has performed so far this year and where it might head in 2024 and beyond.
At the turn of the year, silver looked on the cusp of a sustained rally as attention was finally starting to shift towards the strong industrial demand for the metal and away from the impact of rising interest rates around the world, in particular those implemented by the Federal Reserve.
Those hopes of the momentum seen in late 2022, where the silver price rose from around $18 an ounce to nearly $24, proved short-lived in 2023 as the prospect of further rate hikes by the Fed kept a lid on further silver gains and resulted in the price drifting down to $20 an ounce by early March.
Just as silver looked set to fall below the $20 threshold, a reappraisal of how many more rate hikes would be needed by central banks to fully curb inflation saw silver get a fresh boost and surge swiftly up to $26 an ounce by early May, close to the high of 2022. However, that proved to be the high point of the year rather than a chance for silver to push on towards $30 an ounce as the Fed had further rate hikes in store, opting for a “higher for longer” stance on the future trajectory.
Since that May high, the silver price has broadly trended lower and sits a little above $22 an ounce, close to the middle of its trading range for 2023 so far. But what are silver’s prospects from here? Is silver more likely to rally or is the metal set for further declines?
Supply & Demand
Viewed from a supply and demand perspective, it is difficult to understand why silver continues to trade at such lowly levels. The metal is set for its fifth consecutive year of supply deficit as mined production fails to keep pace with increasing demand from the solar industry and the energy transition more broadly, where silver’s excellent conductivity makes it a key component.
Silver demand for photovoltaics is set to reach a record level of 161 million ounces this year, according to the Silver Institute, a 15% increase from 2022. While mined production is also set to increase this year, rising to 842 million ounces from 822 million in 2022, this is only enough to cover the extra supplies needed for the solar industry and not enough to match increased demand from other sectors.
This supply/demand imbalance has been exacerbated by delays in production in Peru, one of the world’s largest sources of silver. Hochschild reported its silver output in the six months to June 2023 at 5.4 million ounces, a sizeable drop from the 6.1 million it produced in the same period a year earlier. This was mainly due to delays in securing a key approval at its Immaculada mine.
Given that silver’s main source of industrial demand is in sectors that have strong long-term growth prospects, such as solar and batteries within electric vehicles, the demand case for the metal looks healthy for the foreseeable future.
One sign that the most extreme of the supply/demand imbalance may have passed can be seen in the amount of silver stored in vaults in London with levels edging steadily higher in recent months to stand at 27,594 tons, according to LBMA data.
Another trend worth keeping an eye on is imports to India, one of the largest buyers of the metal. Volumes have been falling since the government increased import tariffs with the figures for August showing an 83% decline year-on-year.
Macroeconomic & Geopolitical Factors
Unfortunately for silver investors, the metal isn’t solely influenced by the pure supply and demand fundamentals, with the words and actions from the Fed and its officials having a key influence to bear on the silver price.
The switch by the US central bank to a hawkish policy back in April 2022 to try and curb stubbornly high inflation has had a hugely bearish influence on silver. It was the major factor behind silver’s multi-month slump in price from April through to September last year and a key reason why the price has failed to make sustained gains ever since.
Rising interest rates can make physical silver, with its lack of yield, less attractive than other interest-bearing asset classes such as bonds. Furthermore, the increase in US interest rates has strengthened the US dollar, putting further pressure on all those assets priced in the greenback, including silver.
There is, however, a light at the end of the tunnel, with the Fed potentially at the end of its rate hike cycle; this optimism is tempered slightly by interest rates remaining close to 5% for a significant period of time, and no sign of cuts to the benchmark rates any time soon.
As well as being an industrial metal, silver is also perceived as a haven asset that can offer investors security in times of crisis. The recent events in Israel and Gaza fall into that category, so silver could yet see increased demand in the coming weeks as investors look to take risk off the table and move away from equities and into cash and precious metals.
Different Ways to Invest in Silver
If after considering all the factors mentioned above, you decide that silver is the investment for you, what are the best ways to increase your exposure to silver?
Buying silver bars or coins is often an investor’s first step in holding the precious metal. These can easily be bought and sold via reputable dealers with the price easy to track since it’ll broadly reflect the spot price of silver at any given time. The Kinesis Bullion store offers its own range of silver coin and bar products, which are available for US customers to purchase here.
For those deciding against physical ownership, exchange-traded funds (ETFs) can offer investors the chance to have exposure to the silver price. These funds track the price of silver, less a small commission fee, with the digital nature of the product meaning that investors can buy or sell at any point rather than having to find a suitable dealer.
Kinesis has created a product to bridge these two investment worlds. Its digital silver-backed currency, KAG, offers the security of a physically-backed product with the simplicity of an online, easy-to-trade asset. Each KAG is backed by one ounce of fine silver stored in fully insured and audited vaults, in the investor’s name.
In addition, KAG enables holders to spend physical silver, anywhere in the world via the Kinesis Virtual card, with the added bonus of paying holders a monthly yield based on transactions carried out using KAG over the preceding month.
KAG takes all the positives that holding silver offers and mitigates the effects of inflation, as an easy-to-use digital currency freed from the machinations of central banks.
Silver Forecasts
Silver was the pick of the precious metals in the LBMA’s annual forecast survey with the average expectation that its price would be 8.8% higher by the end of 2023 compared with where it was at the end of 2022.
More recently, Saxo Bank maintained its “patiently bullish view” for silver based on expectations that the Fed will not raise interest rates any further.
Saxo Bank’s wording succinctly sums up the outlook for silver. The metal’s long-term prospects remain very strong with demand only set to increase given its key role within the energy transition. Yet the path to higher prices cannot run smoothly with macroeconomic bumps along the way. Ultimately, the patient investor should be rewarded with 2024 likelier to see silver climb higher back towards $26 an ounce than fall much further than its relatively modest level currently.
With the shift to solar, and other renewable sources of energy, only set to increase in the coming year as governments struggle to achieve their 2030 climate goals, silver’s demand prospects remain rosy in 2023. Indeed, another deficit is likely as even though output from mining is expected to increase this year, it is unlikely to be able to keep pace with the surge in demand.
Furthermore, despite silver’s bullish run, which has seen it rise from its September low of below $18 an ounce to now be trading around $24 an ounce, the price of silver still remains some way off its high of 2022, even though the fundamental outlook has strengthened considerably since then.
Silver, therefore, still has plenty more upside potential with a strong demand case supporting it.
Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience in writing about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News.
As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewable energy and the challenges of avoiding greenwash while investing sustainably.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
