Don't Forget About Silver!

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased today to welcome back one of our very own: Maria Smirnova, Senior Portfolio Manager at Sprott Asset Management. Maria, thank you for joining Sprott Radio.

Maria Smirnova: Hi, Ed, and thanks everyone for joining us.

Ed: Maria, before we go into the outlook on silver going forward, can you give us a quick recap of what happened in 2023 as relates to silver?

Maria: Last year was not a great year for the silver price. Silver held in. It was pretty flat, but it definitely underperformed relative to other markets and even other metals such as gold. It was pretty flat versus gold, which was up 13%, and obviously, some of the major markets were up even more. I would say that one thing we should realize, though, is that, on average, the silver price did improve for the year last year to $23.10 per ounce. That was up from $21.73 per ounce in 2022.

I would like to remind people that even as recently as 2019, the silver price was in the mid-teens, about $16 on average. Silver prices have improved over the last few years, particularly after COVID. Of course, our outlook going forward is we think that there are things in the market that people necessarily don't realize, but the silver price could go a lot higher because of the dynamics of the market going forward.

Ed: Today, I want to dive into some of those dynamics. Before we do that, you mentioned something about gold being up 13% and silver being relatively flat. Historically, people have talked a lot about the gold-to-silver ratio. In your view, in the modern era, does that still matter? Do you use that at all? How should investors think about that now going forward?

Maria: I do look at the gold-to-silver ratio sometimes, but it's not something that I look at closely. I think it's a good metric to see where we are relatively in the cycle. For example, back in 2020, it reached about 120:1. At that time, silver was thrown out like a baby with the bath water because the concern was that with COVID, the industry would shut down and nobody would need silver. At that time, I said that that was the high and silver would outperform gold. Of course, that's exactly what happens. Silver did outperform gold because when we see actual interest in the metals we see Western investors come and buy the ETFs and have an interest in silver as an investment. Silver tends to react faster and more because it's just such a small market, and it is easy to move the price.

You can look at certain points in history as markers, and you can look at the gold-to-silver ratio, as well as the highs and lows. Right now, we're at about 90:1, so it's still a high ratio, which tells me that it is likely that silver will outperform gold going forward. It's not a guarantee. I know it's a long-winded answer, Ed. I do look at it, but I wouldn't swear by it. You know who I am. It's not something I pay a lot of attention to.

Ed: It's not an absolute. I think that's the takeaway here. It's a tool, but it's certainly not an absolute. You touched on Western buyers of silver versus the rest of the world or Eastern buyers. We're seeing the demand continue to increase in silver. Who are some of the buyers today? Where is a lot of that demand coming from?

Maria: Silver has always been a metal of two heads, as I call it. Half of the demands are industrial, and the other half are investment and investment-like categories such as jewelry, silverware, and actual bar and coin investment. In recent times, though, that has been shifting, and industrial demand has been gaining, relatively speaking. It now represents over half of the total demand for silver. That's the category that has been growing strongly. Projections are that it hit a record high of 632 million ounces last year in a 1.1- or 1.2-billion-ounce market. Of course, when we talk about investment demand, that's physical investment in coins and bars, which has been growing strongly.

It hit a record in 2022. We don't yet have final data for 2023, but projections are for that demand to decline.

When I say Western investors, ETFs are the easiest gauge for that. That's the most visible number we can look at because it's on Bloomberg and other data sources. We've seen outflows in ETFs. I feel that demand has shifted from the West to the East in terms of investing demand. We are seeing record buying out of China recently.

Trading in Shanghai has been strong. In fact, the Chinese are paying a premium for silver of about $2.50 or $2.70 per ounce. Sometimes, that's a pretty big premium of 10% or more in a tiny market. To answer your question, the short answer is industrial is gaining importance, number one, and the second takeaway is demand has shifted to the East for now. When we do have that Fed pivot or when we do have something in the economy that sparks investor demand over here in North America and in the West, that will potentially really drive prices higher. That's, overall, how I think about the demand for silver.

Ed: Speaking of that demand, let’s talk about industrial. That's a very broad net. What are some of the major industrial applications we're seeing today in silver?

Maria: Of course, electronics are a big component of silver. Silver, as you know, is a great conductor of electricity. Electronics and electrical applications represent a very large amount. Of course, we discuss solar photovoltaics as a very important application, and that's something we focus on because that's a very fast-growing segment. In fact, over the last 9 to 10 years, solar has grown about 16% per year on average. Last year, it reached almost 190 million ounces.

That's a record, up from 140 million in 2022. That's huge growth. It started with a small base, obviously, but it's gaining importance as we go along. Projections are for that growth to continue because, number one, as governments seek cleaner air for their countries, there are definitely political/policy objectives for cleaner energy, and that's a wholly other subject.

I think investment in solar will continue. We've made projections and published an article stating that by 2030, we think that silver use in solar alone could easily reach 300 million ounces. Think about that. That's 30% of the silver supply, including mine and scrap supply. That's an incremental over 100 million ounces that we'll need just for solar. That's about ten big mines, 5 to 10 big mines. That's another big use, obviously.

Silver is used in electric vehicles and vehicles in general. Still, as we transition from ICEs or internal combustion engines to electric vehicles and hybrids, the loadings of silver are increasing per vehicle. Just by definition, as the ratio of electric vehicles increases, silver use is increasing as well. It's not as big of a use as solar currently, but it's been growing at a good clip and will continue to do so. Those are the major uses of silver in industrial.

Ed: What's going on in the silver mining sector right now?

Maria: My job obviously is to meet with mining companies and track mining companies more so than the macro side of things because we invest in these companies. I try to find new projects, specifically in silver. I always ask everyone, "Hey, give me silver ideas." The truth is mine supply has been stagnant for the last ten years. If we look back to 2013, mine production was at 845 million ounces. If we look back at last year, projections are for about 820 million ounces. That's a decline of 25 million ounces. Last year was an anomaly because a big strike in Mexico shut down some silver production at a big mine.

Even in 2022, it was 837 million ounces. The takeaway is mine supply has not changed in 10 years. That is incredible to me because there are companies that are exploring silver, trying to find new deposits and building new mines. We've gotten nowhere in ten years, and that's because the silver price has been relatively weak, as we've discussed. There's not been much investment into exploration.

Companies have not been able to get a lot of funding, so the focus has shifted to things like copper, lithium, nickel and even gold. Silver has been left behind. Going forward, I would say that I am always looking for new exploration stories. Some new deposits are on the table, but they will still take years to permit advance, build, and put into production. In terms of the outlook for the mining side of things, anyway, I wouldn't see spectacular growth. On the scrap side, on the recycling side, it's the same thing.

It's been exactly flat at about 180 million ounces a year since 2013 for the last ten years. The story is simple. Recycling is quite price sensitive, and because silver prices have not been very high, there's not been that incentive to recycle. As we go forward and think about solar panels, we will see that they are hard to recycle. For many of the uses we think about, such as a car, phone, or TV, silver goes into these things in relatively small amounts, meaning there's not much incentive to get it out.

The technology is not necessarily there to get the silver out. A lot of the silver that goes into industry is never to be seen again. What is recycled? Well, it's things like spoons and forks, silverware, and jewelry that are recycled and easier to melt down for scrap. That's kind of the picture. I don't see much growth coming up from anywhere for the supply side of things.

Ed: It's interesting then, as demand continues to creep up, whether it's solar or whether it's industrial in general, the auto industry, and so forth, you got to believe that there'll be a pinch point somewhere along the way. We're not here to prognosticate where the price is headed, but do you see an environment where silver could touch new highs? Correct me if I'm wrong, but I think silver at one point broke north of 50, perhaps touching over 60 for a moment in time. That's before we get into inflation-adjusted numbers.

Do you see that parabolic move again, potentially in silver, because this demand continues to grow and supply has been relatively flat? How should investors be thinking about that as they look to potentially add this to their portfolio?

Maria: Yes, that's an excellent question, Ed. Despite these continued supply-demand deficits in silver, one of the pushbacks has been on the ground inventories. Silver is held in London, and the LBMA silver is held at the COMEX. Also, in Shanghai, there are inventories. In recent years, those above-ground inventories have been over a billion ounces. What's happened with the recent deficits is we have taken a chunk out of those ETFs of about 400 million ounces. If that continues, in other words, if these deficits continue to translate into a reduction in above-ground inventories, that's something we need to watch. Yes, there will be a pinch point then.

By the way, many of the LBMA inventories are not freely available. They're accounted for the exchange-traded funds. We can't look at all these inventories and say they're available, but that's an aside. In general, I am looking for a continued reduction in the inventories. Silver could very well play out like palladium did a few years back, where people ignored deficits. There was deficit after deficit year after year. At some point, palladium price just exploded. Sometimes, it just takes a while and a few years of things to reach that pinch point, after which there's nowhere for the price to go but up.

Ed: Not to draw any parallels, but we've certainly seen that in uranium in the last couple of years. It was ignored for the better part of a decade, and then the world woke up and certainly took off. Again, not to draw a direct parallel between the two, but it also feels like that's brewing in the silver market. What other topics should we be talking about or things that I didn't ask that you think investors would benefit from listening to this podcast? Is there anything I didn't mention that you'd want to leave the listeners with?

Maria: One thing we did not talk about is silver equities themselves.

Ed: Yes. Let's talk about that.

Maria: The miners, the producers, and the explorers. Like I said, they've had a hard time and reached valuations at funny levels nowadays. If you look at most financial/valuation metrics, silver equities are by no means expensive. They're quite cheap. People ask me all the time, "Why is that? Why is there no interest in the equities?" I'm not quite certain. All I know is that there's been no interest. Meanwhile, the Magnificent Seven is reaching bubble proportions. I think people have been focused elsewhere, and there's no need to look at gold and silver equities.

Gold equities are in a similar position, by the way, because the economy's ticking away, and unemployment is low. There's "no crisis." Who needs gold and silver equities? Well, I can't predict the future, but I think there will be a time when that changes. Demand has already been shifting to the east. As you know, people in the East are long-term thinkers, and they are positioned for the future. I think we in the West should wake up and have the same type of interest because these are strategic resources. These are things we'll need, especially silver. I consider silver a critical mineral. It is a critical mineral, even though it's not really on the critical mineral list. Not in Canada or the US, unfortunately. I'm not sure why that is, but it's a metal for the future.

As we've discussed, those futuristic-type uses are already growing at a fast clip. Silver is very important to me, and I think we need to invest in the miners to secure that future. I'm very interested in the miners, and I'm very interested in silver bullion as well. I think both are good ways to play. It'll take a bit of time for the interest to come back in the equity space.

Ed: Yes, I think you touched on a great point, which is silver is the metal of the future. Copper has resurgence as it's needed more and more in technology. You can't move electricity from point A or point B without it. It feels like silver is in the same category. People have thought about it one way for so long that they can't open their minds to it as a modern metal in a lot of ways. I think there are some exciting times to come for silver, and we'll continue to lean on you and your expertise to help us guide our way through these opportunities.

Maria, I always appreciate you taking the time to update us on what's going on in the space. Thank you once again for making the time today to be on Sprott Radio.

Maria: Thank you, and have a wonderful day.

Ed: Thank you. For all the listeners who want to learn more about Maria and her work and all the research that we do on silver, I encourage you, as always, to visit us at sprott.com and get some updates on what we're doing in the silver space, whether it's on the physical side or the equity side. Once again, I'm your host, Ed Coyne. Thank you for listening to Sprott Radio.