Silver prices have basically gone nowhere over the past several years. But, all of a sudden, hedge funds are piling into the precious metal.
Their net long position in silver is now north of $4 billion. And that position nearly doubled during the month of May.
So why have hedge funds stuck their necks out on what seems to be a losing bet?
Simple – supply and demand fundamentals are finally improving.
Mines Drying Up and Filling In
Global silver production went up for 12 straight years. In 2014, there was an increase in production from mines to 877.5 million ounces, a record.
But that will soon change as low silver prices start to hit home. Prices fell 20% in 2014 and 36% in 2013.
This year is expected to be the first year we’ll see an outright drop in production from silver mines – a combination of a lack of investment into new mines and the natural decline of aging mines.
Additionally, 70% of the world’s silver is mined as a by-product of mining other metals, including gold and copper. Lower prices for these metals are encouraging less mining activity. Thus, less silver being produced globally.
Ironically, this first drop in silver production in 12 years will coincide with a jump in demand for the metal.
Silver Is White Hot
Yes, demand for silver coins and bars is expected to rebound. Sales of these items already rose in the first quarter of 2015.
This is partially due to the rising demand for silver jewelry from previously emerging economies, such as India. The Silver Institute says demand there for silver jewelry has soared 47% from 2013 levels.
But there’s another new demand source and, surprisingly, it’s coming from the industrial sector. Last year, this sector accounted for 56% of overall demand for the precious metal!
Silver Saved by Solar
Most people don’t realize this, but silver is an energy metal – it’s a necessary component in photovoltaic solar cells in the form of paste.
You see, as sunlight hits the silicon cell, it generates electrons. The silver paste is used as a conductor to collect electrons and form an electric current. The average solar panel uses about two-thirds of an ounce of silver.
Last year, offtake from the solar industry for silver rose 7% from 2013. That was due entirely to increased installations of solar panels. And, as I’ve told readers before, 2015 is shaping up to be a good year for solar power.
According to research firm IHS, solar power demand is slated to increase by 30% in 2015 to 57 gigawatts of electricity.
China will account for a large percentage of this increase. It’s expected to install over 17 gigawatts of solar power capacity by the year’s end.
The solar industry alone is forecast to use at least 70 million ounces of silver this year. That number should rise every year, too, as solar power installations move higher.
Of course, demand alone won’t send the price of silver rocketing higher…
But the combination of rising demand and less silver being mined will. The current climate should cut into the physical silver surplus by a good amount, perhaps lowering it by 50 million ounces to around 200 million ounces.
That makes ETFS Silver Trust (NYSE:SIVR), which holds silver bullion, an easy way to join those hedge funds on their bullish bet on silver.
And the chase continues,
by Tim Maverick