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Understanding Silver Demand Dynamics

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Sep 10, 2019

Published: 10th September 2019 Product in Focus: ETFS Physical Silver Key Points Silver has historically performed in a similar way to gold 50% of silver is used in industrial applications including solar cells and automotive electrics A supply shortage of silver may impact price in the future MER: 0.49% p.a. Silver has become increasingly interesting to many investors. Not only does it exhibit similar properties to it more popular brother, gold, but it also has a much wider application in industry which gold doesn’t have. As such, for strictly investment purposes, silver has historically performed in a similar way to gold, but also has further support from industrial manufacturing demand and applications. Investors should consider this precious metal if they want exposure to an asset that, historically, benefits from both investment and non-investment demand. Non-Investment Demand Non-Investment demand comprises about 50% of silver demand. This can be split into four categories, seen in the table below. For this note we focus on the industrial and technological aspects. Additionally, we briefly look at the supply deficit in silver, which should provide a support for silver prices. Demand Driver Million ounces Percentage (%) Industrial and technological (including solar, automotive, brazing and soldering) 593 52 Jewellery 204 18 Bar and coin 193 17 Silverware 60 (approx.) 5 Source: GFMS, Refinitov/Silver Institute, 31 July 2019 Industrial and Technological Demand The industrial and technological use of silver is integral to many of the current processes used in manufacturing. Crucially, it is expected to grow significantly over the next decade. David Holmes, a senior precious metals analyst from Heraues, made this comment on the growth in a conference held in London at the LBMA in late 2018. Silver’s “long-term fundamentals as industrial demand within the electronics’ sector is expected to double over the next 15 years.” Of the industrial demand drivers for price, the use of solar energy is probably the most interesting aspect. Moving forward, increased demand for silver is expected to come from the solar energy sector, since the precious metal is a great conductor of both heat and electricity, making it perfect for use in solar panels. Solar currently accounts for 2% of the world’s generated power that is expected to grow to 7% by 2030. (1) Additionally, the progressive move towards electrical vehicles will increase the use of silver in cars too. Last year, around 36 million ounces of silver were used in automobiles. Each car itself uses about half an ounce of silver but the continuing electrification of cars is set to see that increase to one ounce. To put this in context, every electrical action in a modern car is activated with silver-coated contacts. Basic functions such as starting the engine, opening power windows, adjusting power seats and closing a power trunk are all activated using a silver membrane switch. Demand Deficit Further bolstering the positive tailwinds for the silver price is the supply shortage. Until recently, this had little effect on price but, as non-investment demand makes up about 50% of silver’s overall demand, it’s hard to avoid the impact of this continuing trend of demand not being met. Investment Demand Silver’s investment demand is based on a combination of fundamental drivers but also impacted by momentum. Fundamental Fundamentally silver’s investment demand profile is almost identical to gold. Currently this is primarily based on the desire to avoid currency debasement and the need for protection from threats to investment returns like trade wars and the end of the equity cycle. As much has already been written on this in regard to gold, this note will assume good knowledge of this from the reader. Momentum Momentum is also a driver of silver. Often increased interest begets further interest, and this can either help the price of silver move up further than expected short term or serve as a strong support when there is a correction. On this, the futures market gives a good indicator of momentum via the “net speculative positions” charts. Below you can see that silver is currently net long in terms of its futures positioning, meaning that there are more buyers than sellers. On the short-term, one can see that the positioning has risen up very rapidly lately, however, crucially, it doesn’t look extended versus other periods – especially versus 2016. Furthermore, the current positioning is off the back of a period (2018 – Q1 2019) where, on several occasions, silver was in a net short position i.e. investors were betting that silver was going down. As you can see, this was the only time this was the case since 2009 and serves to reinforce the current position as not overbought. Gold/Silver Ratio Finally, there is the gold/silver ratio. Many look at this as an indicator as to whether gold is expensive relative to silver or vice versa. Currently, based on this measure, silver currently appears undervalued. For those who believe the relationship should reinstate itself, many are buying silver as well as gold. Our view at ETF Securities is that it is not entirely clear whether this relationship stands anymore, or, at least, is as strong as it once was. This is because the use of silver in a non-investment capacity has grown so much over the last decade that it is becoming equally as meaningful as the investment demand. This is in contract to gold which is much more driven by investment demand. Nonetheless, we are not saying the ratio has no value. Only that it should not be a primary driver of silver investment. Summary In summary, silver’s price is dictated by both investment and non-investment demand. Silver shares many of the same fundamental characteristics for investment demand as gold but, because it is used far more widely in manufacturing for industry and technology, its price is also dictated by non-investment demand too. Taking both into consideration in the current environment, silver’s prospects look attractive and we encourage investors to looks at this in more detail. (1) https://investingnews.com/daily/resource-investing/precious-metals-investing/silver-investing/5-factors-drive-silver-demand

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Weekly ETF Monitor for week ending 6 September 2019

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Sep 10, 2019

This week's highlights Geopolitical risks continued to be the focus of markets last week. Asian stocks rallied on the withdrawal of the Hong Kong extradition bill and added stimulus in China. HJPN, CETF and CNEW were all amongst the week’s top performers. Domestic resource stocks also benefited, with QRE and OZR both performing strongly. Gold retreated from recent highs, with GOLD down 2.0% for the week. Gold mining ETFs (MNRS and GDX) were the worst performing funds for the week. Silver also pulled-back from recent gains, with ETPMAG falling 3.0%. Total flows into domestically domiciled ETFs were $226m, while outflows totalled $22m. The biggest inflows were into cash (AAA), gold (GOLD) and a range of other fixed income ETFs (HBRD, FLOT, BILL, QPON, IAF and XARO). STW was the most traded fund last week, while BBOZ and GOLD saw above average volumes. ETFS Physical Gold (GOLD) surpassed the A$1bn mark in total assets under management for the first time last week.

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Weekly ETF Monitor for week ending 30 August 2019

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Sep 03, 2019

This week's highlights Best performers for the week were the suite of physically backed precious metal ETFs. ETFS Physical Platinum (ETPMPT) was up 10.9% for the week, ETFS Physical Silver (ETPMAG) was up 8.4% and ETFS Physical Palladium (ETPMPD) up 6.2%. YTD the top performers remain dominated by gold miners, led by VanEck Vectors Gold Miners ETF (GDX) up 48.2%. The worst performers were agricultural and long Aussie dollar ETFs, with the BetaShares Strong Australian Dollar Hedge Fund (AUDS) down 1.1%. Flows for the week consisted of inflows of $200 Million and outflows of $18 million. These flows were dominated by Australian equities, cash and physical gold. ETFS Physical Gold (GOLD), BetaShares Australia 200 ETF (A200) and iShares Core Cash ETF (BILL) all saw flows above $20 million.

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Weekly ETF Monitor for week ending 23 August 2019

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Aug 27, 2019

This week's highlights There was a small respite for Australian Equity markets last week as the Aussie market closed up before the dip in the U.S.. Equity strategies and in particular gold miners saw the top end of positive returns. BetaShares Global Gold Miners ETF (Hedged) (MNRS) was the best performer over the week returning 4.9%. UBS IQ Morningstar Australia Quality ETF (ETF) also had a positive week up 3.2%. Over the Year to Date gold miners and infrastructure strategies remain strong performers. The VanEck Vectors Gold Miners ETF (GDX) was up 45.2%, BetaShares Global Gold Miners ETF (Hedged) (MNRS) up 42.8% and AMP Capital Global Infrastructure Securities Fund (GLIN) up 27.7%. Year to Date only nine ETFs have had negative returns. Precious metals and gold miners are the best performers over the last twelve months. ETFS Physical Palladium (ETPMPD) is up 70.5% and ETFS Physical Precious Metal Basket (ETPMPM) up 38.4%. Flows over the week consisted of inflows of $180 Million and outflows of $140 Million. Investors globally chased exposure to the safe haven of Gold and Bonds. Most of the inflows were into Australian Cash and Commodities. ETFS Physical Gold (GOLD), iShares S&P/ASX 200 ETF (IOZ) and iShares Core Cash ETF (BILL) all had strong inflows. The largest outflow was from BetaShares Australia 200 ETF (A200).

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Weekly ETF Monitor for week ending 16 August 2019

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Aug 20, 2019

This week's highlights Last week saw positive returns across safe heaven assets like precious metals and consumer staples as volatility continued. China focused ETFs also had a positive bounce with VanEck Vectors China New Economy ETF (CNEW) returning 4.5% and VanEck Vectors ChinaAMC A-Share ETF (CETF) up 3.9%. The worst performers over the week were resources ETFs which were impacted by falling iron ore prices. BetaShares S&P/ASX 200 Resources Sector ETF (QRE) was down 4.2%. Year to Date best performers are Gold miners, property and China focused ETFs. VanEck Vectors Gold Miners ETF (GDX) is up 40.4% and of the worst performers only 10 ETFs are in negative territory. Looking longer term, twelve months to date the best performers are precious metal related ETFs. ETFS Physical Palladium (ETPMPD) is the best performer returning 76% and ETFS Physical Gold (GOLD) is up 37.2%. The worst performers are energy and oil ETFs. BetaShares Crude Oil Index ETF - Ccy Hedged (OOO) is down 18.1% over the period. Inflows for the week were seen mostly in GOLD as investors sought a safe haven given the global volatility over the last month. BetaShares FTSE 100 ETF (F100) also received heavy inflows from its recent launch. iShares Europe ETF (IEU) had outflows of 33.8 Million. Net flows for the ETF market were 77 Million, made up of inflows of 250 Million and outflows of 173 Million.

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