Silver: The Good, the Bad and the Ugly
Thursday, 6/06/2024 12:42
Energy, war and AI bag a few Dollars more from 'Commodities Supercycle'...
REMEMBER the Commodities Supercycle?
asks Adrian Ash in this note sent to DppsVault users in Monday's Weekly Update email.
Back in the early 2000s, and thrashing around for a hot new trend to sell to investors as the DotCom Bubble crashed and burned, investment banks and brokerages latched onto raw materials.
Because, with the internet investing boom plunging from bust to dust, maybe real stuff dug out of the ground was going to take over...
...limited in supply in the just the way that computer code and new issues of tech-stock shares were not.
Well, here we are again. Buy raw materials. The Earth isn't making gold, silver, copper or nickel anymore. Geopolitics and war are pushing demand for those metals higher. And the US Nasdaq 100 index of tech stocks has only been this expensive once before in terms of commodities prices...
...back at – GASP! – the very top of the
Tech Stock Bubble.
Rewind to the early 2000s, and the idea of a Commodities Supercycle took off as the US-UK invasion of Iraq sent crude oil higher, sucking in speculative money fleeing the collapse of the Nasdaq, UK techMARK and Germany's Neuer Markt.
Commodities then flew as China became the No.1 consumer of everything from crude oil to concrete to copper. And while the Western world's 'global' financial crisis did the heavy lifting in taking gold prices 7 times higher between 2001 and 2011, it was the idea of China covering itself in solar panels which drove silver prices back up to 1980's
all-time silver top at $50 per Troy ounce.
This time around, Goldman Sachs has (of course) been
out of the blocks early in talking up the return of the supercycle, starting in spring last year.
After all, the US investment bank was
home to the marketing team which gave the world
the BRICS acronym in 2001...
...a promotional gimmick that has since broken out of Powerpoint sales-decks to become
a political gimmick with its own annual summit.
For promoting the Commodity Supercycle Part 2, the
mainstream media has now really latched on in 2024, along with
major mining companies and even
government bean-counters.
And while gold dominates the headlines in our little corner of the natural resources markets, it is actually
silver...the far more useful precious metal industrially...which has shone brightest this spring.
Since the end of February, in fact, silver has outperformed pretty much every other hot-hot investment trend you can name...
...rising almost 40% in Dollar, Sterling and Euro terms in just 13 weeks.
Our chart tracks the price of silver and a bunch of other assets. Just for fun, we've priced everything in terms of the Euro, too.
Rebased to 1st March, the chart enables us to compare the relative gains across this clutch of go-go investments. And, as you can see, silver blew past gold and Bitcoin...
...outperforming green energy, military manufacturing and even artificial intelligence in the 3 months ending last Friday, the end of May.
- Danish windpower giant Ørsted (CPH: ORSTED) gained a nice but unexciting 8% in Euro terms;
- US defence giant Raytheon (NYSE: RTX) leapt by nearly 20%, outpacing its rival Lockheed Martin (NYSE: LMT) three-fold;
- Nvidia (Nasdaq: NVDA) rose 38% as the world went gaga over the 'artificial intelligence' chipmaker's earnings and outlook.
Why highlight those 3 stocks?
It's because they are leaders in their fields. And those fields...of energy, military conflict and AI...now dominate today's headlines, outlook and long-term spending plans.
For policymakers (and I suspect for most other folk too) these boom industries feel like the good, the bad and the ugly of tomorrow arriving uninvited today.
Switching to green energy is clearly better than choking on the fumes humanity has spewed out since prehistory. Renewable's promise of a sustainable future clearly contrasts with throwing money at wanting or preparing for war, whether in attack or defence. Artificial intelligence meantime remains a Pandora's Box, offering to fix untold problems while
delegating ever-more power over our daily lives to a
'Computer says no!' dystopia.
Whether you like them or not, these bandwagons will keep on rolling, and silver is vital to each of them. On top of
silver's key role in solar power, mostly that's because any object you can name with an on/off switch is certain to contain a little or more of
the 'indispensable' metal.
Copper also figures very heavily in today's 3 boom industries of green energy, defence and AI, needed for wiring together all those silver-based solar panels and electrical switches. The base metal stole the financial-news headlines in April and early May as it shot up to new all-time record highs, driven by chatter and forecasts of relentless shortages ahead.
"Existing mines and projects under construction,"
gasps CNBC, "will meet only 80% of copper needs by 2030, according to the International Energy Agency."
"Six new large mines need to come online every year by 2050 to meet global copper demand," adds
a mining mechanic, "but the problem is it takes about 20 years between discovering a new copper mineral deposit and getting a permit to build a mine. None of this takes into consideration the upgrades to the electrical infrastructure needed to 'electrify' the world by 2050."
So in short, he concludes, "electrifying the world by 2050 is a politician's pipe dream that will never happen."
Hence the recent surge in copper prices, driven by talk of structural and unfixable market deficits between supply and demand in the decades ahead.
Short term, however, the apparent shortage of copper supplies suddenly seems to have got fixed last week. Chinese warehouse stockpiles of copper...sometimes known as the metal 'with a PhD in economics' thanks to its use across construction and industry worldwide...rose to 322,000 tonnes according to data from the Shanghai Futures Exchange. That's
almost 3 times the average May level of the past 5 years...
Maybe those new record-high prices lent a hand in fixing the 'shortage' of supply?
Similarly for silver, "Ample above-ground stocks remain the key challenge to prices," said specialist consultancy Metals Focus when its
latest supply-and-demand data was launched with April's publication of the
World Silver Survey 2024 from the mining industry-backed Silver Institute in Washington.
Yes, silver’s supply/demand conditions "are expected to enjoy another strong year in 2024," Metals Focus says, thanks to "robust gains from [solar] applications and a decent
performance in other segments [taking] industrial demand to a new all-time record.
But even as silver's market deficit widens 17% year-on-year on Metals Focus' estimate, reaching the second highest on their data series, stockpiles of silver bullion in London and exchange-registered vaults (mostly in the US and China) amounted to nearly 15 months of global supply at the end of 2023, "and there are bullion inventories also held elsewhere.
"This is likely to prevent a physical squeeze from emerging in the short-term" even as new mine output lags demand by a near-record level.
As for crude oil, the Opec+ cartel of producer nations, "under the leadership of Saudi Arabia, has tried to push global oil prices
towards $100 a barrel," says long-time energy correspondent Javier Blas at Bloomberg.
"Now it appears it's reversing course," giving up its quest for the return of $100 oil as global demand falters but supplies do not in the face of that 'impossible' electrification.
Simply put, this new Commodities Supercycle – if it turns out to deserve the name – is very different from the early 2000s' version.
Crude oil won't figure. Nor can China shoulder the bulk of new demand. Its economic growth is very much lower today than 2 decades ago, not least because two-decades-and-more of massive infrastructure, real estate and factory building are now behind it, leaving a threat of over-capacity, saturation and falling prices.
But what coal was to the first industrial revolution and oil was to the 20th Century, silver and copper are to today's big boom industries of green technology, artificial intelligence and defence. And driven by these long-term prospects,
short-term speculation in silver has skyrocketed.
Why else do you think the price of silver jumped 40% in just 13 weeks?
As the green line shows, bullish betting on Comex silver futures and options has jumped to the highest levels in 2 years this spring, surging at the fastest 3-month pace since mid-2019.
Trading volumes in Shanghai silver futures meanwhile leapt tenfold in mid-May from the same period in February...
...helping push prices on the Shanghai Gold Exchange to a record premium over London quotes of almost $4 per Troy ounce.
Longer term, of course, demand and supply for silver itself will be what matters. But tick-by-tick, the supply and demand for leveraged betting credit usually counts far more.
Put another way...and with sentiment fuelled by the latest news and views around the good, the bad and the ugly of our 21st Century boom industries..."Institutional investment will remain the dominant price driver,"
says Metals Focus.
That's why they expect "any price weakness to be short-lived, given that the Fed is still expected to start monetary loosening later this year, albeit at a slower pace than previous expected.
"We expect precious metals investor interest will be healthy in the second half of the year, which will ultimately be positive for the silver price."
So will silver's deep market deficits. But more because of investor sentiment towards that fact than via any immediate tightening of supply for industrial users.
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