The London Bullion Market (LBMA) and New York-based COMEX keep track of the total supply of silver on the market. Gold reserves remained pretty much constant over 2022, but silver fell dramatically from roughly 1.15 million Troy ounces at the start of the year, down to around 850,000 by October.
What's interesting is that reserves are plummeting in both markets, not just the U.S. or UK, leading many to wonder what's going on. Given the rate at which inventory is vanishing, some speculators believe total reserves could fall to zero by the end of next year.
As you might expect, the current silver squeeze is causing a commotion in financial circles. Retail investors are trying to get their heads around what’s happening. The conspiracy theories are back.
There are, however, some genuine reasons for the collapse in silver inventory. Learn more below.
Reason #1: Industrial Demand
Industries that require silver as an input continue to grow rapidly, with demand set to increase significantly over the following years. Here’s a rundown of segments all clamouring for more silver:
- Medical. The medical industry uses silver in a range of portable and non-portable scanning devices. It’s also a popular mineral in reconstructive orthopaedic surgery equipment, cardiac devices, surgical appliances, catheters, water purification systems, bone prosthesis and wound healing.
- Solar energy. Solar panel manufacturers use a significant amount of silver when constructing photovoltaics (materials that convert photons into usable electrons). They are responsible for around 10 percent of global demand.
- Electronics. Demand for electronics also continues to skyrocket as the world digitises. Manufacturers regularly use silver in advanced chipsets since silver has the highest conductivity of all metals. Vehicle electronics are responsible for around 5 per cent of total global demand.
Reason #2: Jewellery Demand
Silver stocks may also be falling because of jewellery demand. With the cost of living going up, many consumers no longer have sufficient disposable income to buy silver alternatives, such as rhodium or platinum. According to estimates, silver demand for jewellery is expected to reach new highs in 2022, up to 1.21 billion ounces.
Reason #3: Traders Anticipate A Return To Normal Gold-Silver Price Ratios
Speculators may also be playing a role. The historical gold-silver ratio is usually somewhere between 10 and 15 to 1. In recent years, however, it’s been closer to 80 to 1.
Hence, physical silver reserves could be dropping because speculators expect a return to the post-war norm relatively soon. Silver tends to dance around significantly relative to gold, even over long periods, but eventually it should return to baseline. The bet in 2022 driving down stocks is that this reset could occur in 2023, particularly because of the high demand from other sources.
Reason #4: Retail Investor-Induced Silver Deficit
Silver industry bodies predict a silver deficit of around 194 million ounces in 2022, up from just 48 million in 2021. If that proves to be true (which seems plausible given falling stock levels this year), then prices are likely to rise significantly next year.
India is restocking, but it will likely cease those operations at some point in 2023. Following that, deficits are likely to normalise, but continue. The world still has sizable stocks: there’s plenty of silver left. But mine production simply isn’t keeping track with supply. In 2021, the world produced 998 million ounces of silver from mining and recycling. In 2022, that figure went up to 1017 million ounces. However, the market balance deteriorated significantly. Total demand bounced from 1,046 to 1,212, a 16 percent increase from the year before, leading to a large deficit, potentially a post-COVID-19 hangover.
Reason #5: Preparing For Financial Armageddon
Lastly, lower silver stocks on the world’s biggest exchanges could be a signal that major investors, both institutional and non-institutional, are preparing for financial armageddon. Predictions of doom often turn out to be false, but this time, things really do seem different.
The biggest concern for markets is the level of debt at all levels in the economy. Government borrowing is at record highs in places like the UK and U.S., and it continues to rise in sclerotic, ageing economies, like Japan. Even China is now buried under a mountain of paper obligations, and it is unclear how the country will get itself out of the mess that it’s in.
There are other major secular headwinds, too: generally high inflation, ageing demographics, supply chain dysfunction, de-globalisation, climate change, regulatory capture, and the prospect of a new global war. Investors with an eye on current economic events are turning to precious metals to protect them from an upcoming social and ecological storm that could literally send humanity back to the bronze age. In that environment, any precious metal, including silver, is worth owning.
Major central banks have been buying gold and silver for a long time and significantly adding to their reserves. China, in particular, is adding real money to its stockpile, perhaps so that it can opportunistically launch a gold-backed yuan if the US dollar gets into trouble. We will see.
Wrapping Up
What’s strange, though, is how the reduction in inventory is not leading to a spike in prices. You would expect a combination of higher demand and draw-downs to make the metal scarcer on the markets, pushing up the cost of the commodity. Prices are higher than they were back in the middle of the last decade, but the overall pattern in 2022 is downward. Silver started the year at around $23 per ounce, and, at the time of writing [November 2022], it is down at $21 per ounce after trading below $20 per ounce for much of the second half of the year.
Even with increased demand and lower supply, we still stock silver coins and bars at The Gold Bullion Company, so be sure to check out our inventory and diversify your portfolio.
