No silver bullet

Market observers see little upside to silver prices as production recovers and demand stabilises.

As the COVID-19 viral outbreak turned into a pandemic in March, gold prices were on the rise and didn’t really slow until August as investors sought safe havens. Since May, silver has outperformed gold and the ratio between the two is now in line with the ten-year average.

A board member at one of the world’s largest polymetallic mines explained, “The correlation with gold has returned a bit. Silver functions as a cheaper refuge and with a little more ease of use (it has industrial uses and jewellery) in addition to the simple hoarding.”

Around 60% of the demand for silver is industrial and May was when the effects of lifting Chinese lockdown restrictions started to be felt in the economy. This increased demand, together with lower US real yields drove the rally that only started to flatten in August.

“We do not see silver continuing to outperform gold as the impact of pent up demand from Chinese industries will stabilise.”

Senior commodities analyst at a European bank.

But what about the supply side? Mexico and Peru are the two largest silver producers in the world with Chile, Bolivia and Argentina joining them in the top ten. Many silver mines in Latin America were halted by government restrictions related to COVID-19 but is this really going to affect the balance of supply and demand?

A Director in the Ministry of Mines and Energy in Peru believes production will be challenging for some time, “Silver is usually found in underground mines and these will take time to recover as many are still suffering outbreaks – open pit mines (zinc, tin, lead) are already back to normal.” The director at a polymetallic mine confirmed, “What happens is that you have to evacuate and isolate 10 – 15 workers because one of them began to feel symptoms. Costs are higher but they are supported by the current price.”

“It is not easy to restore normal production but we are mastering the anti-COVID-19 protocols.”

Board director of a large polymetallic mine.

Although production is challenging and more expensive, output is nearly back to pre-pandemic levels, according to the board director of a polymetallic mine, “It’s not easy to restore normal production but we are mastering the anti-COVID-19 protocols and most mines are at 90%. In my opinion silver will stabilise around the USD 30 /oz level for several months.”

Furthermore, some market observers believe this will be offset by stabilising demand. A senior commodities analyst at a European bank said, “We do not see silver continuing to outperform gold as the impact of pent up demand from Chinese industries will stabilise.”

In short, our sources in the region don’t see much upside to silver’s current price.

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