Silver Can Do It!
Sprott Chief Investment Officer Maria Smirnova joins host Ed Coyne for a timely discussion on the many uses of silver in our modern economy. While silver supply is constrained, demand continues to increase, given silver’s critical role in the global energy transition. In 2022, for example, silver demand for solar panel production hit record levels.
Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. Today, I'd like to revisit one of my favorite metals, silver. I say favorite because it's used in so many things today and is still viewed as a currency and a true commodity. It's consumed.
Given all the action we've seen lately, I thought it'd be fun to revisit silver. I can't think of a better person to have on Sprott Radio than our very own Maria Smirnova, Managing Partner and Senior Portfolio Manager at Sprott Asset Management. Maria, thank you for joining Sprott Radio today.
Maria Smirnova: Hi, Ed. Hi, everyone. Thank you for having me on. I'm excited to talk about one of my favorite subjects, silver.
Ed Coyne: Silver has changed in many people's eyes in the last decade or so, and you've been involved with silver for many years. Let's talk about what's happened more recently. There's been a fair amount of price action in the last month or so. In your view, what do you think is driving that?
Maria Smirnova: Interesting you bring up the last month or so. Silver has been quite volatile throughout history, and it started picking up steam back in the fall of last year. I think what's driving the price really recently, like you said, within a month or two, is all the news with bank failures in the U.S., a couple of bank bailouts, Credit Suisse being forced to merge with UBS. Those types of news [stories] are significant in the financial arena, and they have been supporting and driving the prices of both gold and silver higher.
Ed Coyne: You're still seeing silver, to a large extent – even though it's a true commodity and being consumed more than ever before – you're still really seeing it tethered to the price of gold as far as moving in conjunction with it and being viewed as an alternative asset.
Maria Smirnova: I think it has both characteristics. I think it still behaves with gold, but it sometimes acts independently. As you said, it's an animal with two heads, the industrial head and the monetary head. At the beginning of this year, the monetary head was definitely manifesting itself.
Ed Coyne: It's interesting you bring that up because, for so long, we've always seen gold and silver tethered together. More recently, you're hearing more people talk about silver as front and center. I like to call it the gateway metal to other alternative metals in battery markets and energy markets, and so forth. You almost can't do anything in technology these days without silver. Let's talk about the demand side for a minute. Where are you seeing some of the greatest demand in silver, and what technologies depend on silver going forward?
Maria Smirnova: You bring up a great point about the demand side of silver, the physical side. I'm not talking about people trading silver on the COMEX; I'm talking about physical buyers in the market. That has been exciting. We have fresh numbers out of the Silver Institute, which recently showed how strong the demand for physical silver has been in the last year, specifically. You can pretty much talk about any area of the market, and they are strong. I'll start with investment. The net physical investment last year rose by 22%1. That's a huge increase year over year. Jewelry and silverware were also strong, also double-digit growth.
You asked me, what are the exciting areas? I could argue that every area is exciting from the perspective that it's seen strong growth, but when we talk about exciting areas, we talk about electronics and electrical applications of silver.
As you know, Ed, silver has wonderful properties. It's highly reflective, but it's also very electricity conductive. It's one of the highest conductors of electricity out there, if not the highest. It is certainly benefiting from the global drive towards electrification. Silver comes into play as we're using more electricity and searching for alternative sources of energy, alternatives to fossil fuels.
The first and foremost use in which we're seeing growth is photovoltaics or solar. Last year, we hit a record demand in solar, 140 million ounces1, representing about 14% of supply. It grew furthermore, 28% last year. It’s projected to continue growing at fast rates. This is one area that we're finding very exciting. The other one, of course is, as we're transitioning towards greater use of electric vehicles, we're seeing more and more silver being consumed. The reason for that is, again, silver is used in small amounts but in many different places. From mirrors to air conditioning to any electrical components, particularly with EVs, the silver loadings are increasing, creating more and more silver consumption. I would say those are the two exciting areas. You could also mention the movement towards 5G networks. We saw growth last year in that area. Again, as our networks and communication networks become more sophisticated, more silver is required.
Ed Coyne: There's a lot of almost conflicting information on the recycling side of silver. I read recently that only about 10% of solar panels currently get recycled, and we are, by 2030, going to be having massive amounts of panels that have to be replaced globally, and many of those are simply going into landfills. I’m sure it’s a price determinant. If silver gets to a certain price, it becomes cost-effective to start recycling those panels. Talk about recycling in general for a few minutes, if you can.
Maria Smirnova: Excellent subject. Now, let’s start with the basics. Recycling currently represents about 18% of the total supply, so about 82% of the market. Again, you can think of the total market, the supply side being a billion ounces. Out of that, last year, 180 million ounces came from recycling. The majority of that is coming right now from jewelry and silverware. If you think about your forks, knives and pieces of jewelry you no longer want, that’s where it comes from. To your point, that is highly price sensitive. Someone has to be motivated to bring their old things to be recycled.
In the past, I would say, seven, eight years, we’ve gained about 35 million ounces through recycling. That was the growth. However, in terms of mine production, we lost almost 80 million ounces from declining mine supply in the same period. You brought up solar panel recycling. You’re absolutely correct. About 1 in 10 currently get recycled. My understanding is that the technology is not quite there, and also, we haven’t had that big wave of panels coming out of production that need to be recycled. We, as humanity, have not been forced to create the technology to recycle these things efficiently, and yes, it is also very price sensitive.
I guess what I’m trying to say in a roundabout way is, overall, right now, recycling – while significant in the market – has not been able to offset the decline we’ve seen in mine production. Having higher prices from seven or eight years ago has not helped us create that much more supply from recycling. Again, projections for this year are for recycling to be flat, with no gains. I don’t see recycling as a big area that will contribute to the overall supply of silver.
Ed Coyne: Let’s stick with that for a second. I get the recycling side. You talked about mine supply and how that’s depleting. What are some of the primary reasons or drivers behind that? Why is mine supply depleting?
Maria Smirnova: I think that’s quite simple. The silver price has been bumping around between $17 and $25. Right now, we’re sitting at about $24, which is great, of course, but there have been many periods when the silver price dropped to $17 or $18. At those levels, the mining industry has not had sufficient stimulus or incentive to go out there and find new deposits and build new mines. It’s very hard to finance a new silver mine. First of all, let’s start at the beginning. It’s very hard to find a substantial new silver mine. By substantial, I mean anywhere between 10 and 20 million ounces. Those are considered big silver mines and are hard to come by.
COVID, of course, also did not help. There were a lot of shutdowns, as you know, in COVID time. Frankly, we have had a bit of a bounce back, but the bounce back has been very, very disappointing. There are some mines that shut down permanently. Some mines have been depleting their resources, and their grades have been going down, so the richness of the mines has been declining. As I said, these have not been replaced through new exploration and new mines coming into production. The reason for that, I think, again, is this “depressed silver price.” I truly believe we need a higher silver price to create more supply.
Ed Coyne: That dovetails into the health and the development or the growth of mining stocks in general. In particular, silver mining companies. Also, I guess a one-off from that would be from a geopolitical standpoint. There are certain parts of the world where it’s just a no-go zone with risk of nationalization, and the rule of law, and those sorts of things. Maybe that contributes a bit as well.
Could you spend a few minutes talking specifically about the physical metal, the silver itself, and the miners themselves? What challenges are you seeing for existing and potentially new mines coming online? What do you see on the mining side?
Maria Smirnova: On the mining side, you must go where the geology is – where silver is prevalent. It’s in Latin America and the whole belt up to Mexico, the United States, and Canada. But in Canada, we don’t mine for silver for some reason. It’s that whole mountainous range of subduction and zones where we see a lot of silver — countries like Peru, Argentina and Mexico. Again, Mexico is very rich in silver.
In many of these countries, which are still developing countries, we’re seeing political unrest. We had riots and protests in Peru; we had changes in the government of Peru. Similarly, in Mexico, the new president has been talking about mining reforms. Very recently in Mexico, we read that they are proposing mining reforms. These reforms, if they go through, will make it more difficult for mining companies to gain concessions and, more importantly, develop their mining concessions. These factors contribute to the expansion of the mine supply which is slower than we would like.
Ed Coyne: From what you’ve said so far today, the demand isn’t decreasing. Effectively, you’ve got to squeeze in supply from the mining side. You’ve got recycling, I think you said around 18% right now, total supply, and yet demand is spiking. I got to believe prices continue to look pretty attractive, at least over the next one to three years if we continue to use all these technologies like self-driving cars, solar panels and all the reflective technology we need. It seems like the future for silver could potentially be very attractive. What do you think the overall health of the silver market is today?
Maria Smirnova: The silver market is a study in sharp contrasts. I will explain that statement. As we’ve discussed, last year, we had a record physical deficit of almost 240 million ounces. I talked about the size of the supply being a billion ounces. The total demand was actually 1.24 billion, so we were short 240 million ounces. That is a huge number if you think about it. That has contributed to a decline in global inventories of silver. That’s logical. As we have deficits, they draw down inventories. Otherwise, where does the silver come from?
The price has been driven by – not necessarily the physical market – but more, I would say the paper market, the trading on the COMEX, and overall, primarily institutional investors. Last year alone, we saw a decline of about 125 million ounces in exchange traded funds, or ETFs. That, I think, is what’s been driving the price. It’s that institutional lack of demand or interest. Unfortunately, when we talk about coins and bars, that demand is mostly retail demand, and the industrial demand has not been able to offset and contribute to the price rise.
Now, I will say I think that will change. Again, I think it’ll change because we're forecasting deficits for at least the next five years. This information is coming from Metals Focus in the Silver Institute, so I’m not making it up. There’s a pronounced lack of new supply with a very pronounced growth in demand, which has created the situation. I don’t think people realize the gravity of the situation.
I think as time goes on, year over year, and as we continue drawing down silver stocks in London, on the COMEX, as those physical ounces disappear, that balance between institutional investors controlling the price to the physical market controlling the price, in my mind that might very well change. We just need to continue down this path of eating up all our supply and not replenishing it. Sooner or later, the fundamentals will win, I think. So far, I believe the price has been driven by more institutional lack of demand and paper trading2.
Ed Coyne: Is it fair to say that silver is at an inflection point of going from a metal you trade to a metal you invest in for multiple market cycles? At Sprott, we do a lot of work with private families and big institutions, and many times, they look at assets and investments for the next 10, 20, 30 years. It seems to me that, again, as long as the technology is going to demand silver, as long as the supply continues to be constrained, there’s a pretty unique opportunity here over the next couple of market cycles.
Maria Smirnova: Sometimes it's very frustrating for me to look at the price of silver. If it's not acting very well, I think it can be very frustrating, like I said. I believe a change is happening in the market, and we discussed these changes. This electrification theme will not go away. The world is moving towards cleaner energy, and silver plays an integral role. By the same token, I would say that the world's governments have not fixed their fundamental issues and have not figured out how to run their finances better, which means only one thing. They will print more and more fiat currencies.
I do believe in silver and gold as protectors against fiat currency debasement. For me, those two key factors for silver, and again, it's great that it plays both roles, they provide a great investment thesis for the metal.
Ed Coyne: Yes, I think that's one of the most unique things about silver is it can serve both sides. It can serve as a natural low-cost liquid hedge to the broader markets, but also from a demand standpoint, from a technology standpoint, I think there are a lot of things happening in silver today that are pretty exciting.
What I would tell all of our listeners today, first and foremost, thank you for listening to Sprott Radio, but more importantly, for those who want to learn more about Sprott and Maria's work in silver and our white papers and our stats that we put out, we encourage you to visit us at sprott.com, which is S-P-R-O-T-T.com, where you can learn more about everything Sprott, but specifically silver, and more importantly, Maria's work in silver. Once again, I'm Ed Coyne, and you're listening to Sprott Radio.
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