(Wallace Refiners) – Despite global mine closures in early 2020 and historic investment demand, the silver market actually saw its biggest surplus on record, according to the latest report from the Silver Institute, which Metals Focus conducted.
The U.K.-based precious metals research firm noted a significant drop in supply last year as mines were forced to close due to the COVID-19 pandemic; however, the drop in supply was overshadowed by the collapse of the global economy as governments imposed strict lockdown measures in mid-March.
“When you had wide-spread lockdowns, this really hit the consumer electronics side, and that is one of the reasons why we saw a decline in silver ’s industrial demand,” said Phil Newman, managing director of Metals Focus, in an interview with Wallace Refiners.
Silver supply in 2020 totaled 976.20 million ounces, a drop of 4% compared to 2019. Meanwhile, total demand dropped 896.10 million ounces, down 10% from 2018.
According to the report, the silver supply increased 319% last year. “The largest silver market surplus since at least 2010, the earliest year for which Metals Focus tracks data,” the report said.
Although industrial demand suffered in 2020, investment demand reached historic levels. Investment demand for silver-backed exchange-traded products (ETPs) took global holdings above one billion ounces for the first time since their introduction in 2006, the report said.
“The growth in ETP holdings just reflects the improving investor sentiment in precious metals,” said Newman.
At the same time, strong demand for silver bars and coins pushed physical investment demand to a four-year high.
Newman said that although weak industrial demand created a significant surplus in silver last year, the metal was in the “wrong form,” which led to a significant supply crunch in investment markets.
“If you look at stocks of silver held in London, in LBMA vaults, you would see elevated levels there. If you look at silver held in the COMEX you would see very large volumes held there as well. But that is not in the form retail investors are buying,” he said. “There has simply been a shortage of silver in the right form, in the right location.”
Newman added that because of production constraints, there is only so much silver mints can turn out into products.
“The mints are working overtime to get products out as quickly as possible,” he said. “A lot of product is being produced, but it ’s just not enough.”
Newman also noted that it takes weeks to transfer silver stored in London to be shipped to New York and vice versa.
As for the failed silver short-squeeze that briefly drove prices to $30 an ounce at the start of the year, Newman said that from the beginning of the social-media frenzy, they warned investors that it wasn ’t going to work.
“The short positions were just not that sizeable,” he said. “We saw strong lows into ETF and into coins and bars. The price reaction we saw reflected that buying. The reason it ran out of steam is that the silver the market is a lot deeper.”
Newman added that for a short-squeeze to be successful in the precious metals market, the buying frenzy has to be sustained for days and even weeks.
Looking at 2021, the Silver Institute and Metals Focus are expecting supply and demand to significantly pick up. For this year, silver supply is expected to reach 1.056 billion ounces, up 8% from 2020. At the same time, demand is expected to be at 1.036 billion ounces, a 15% increase from last year.
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