Silver is currently undervalued in the market, with prices ranging from $24 to $25 per ounce. While many people discuss the bullish case for silver due to potential price inflation, there is another important factor that is often overlooked—the looming supply shortage in the silver market.
One significant driver of this potential supply shortage is the growing demand for silver in the solar power industry. As the solar industry expands, the need for silver will increase significantly in the coming years. However, the current price of silver does not reflect this expected surge in demand.
Industry insiders are already aware of this situation. Gregor Gregersen, CEO of Silver Bullion Pte Ltd., mentioned the upcoming silver scarcities due to the rising demand for silver in photovoltaic (solar) applications during the Asia Pacific Precious Metals Conference.
In 2022, silver demand reached record levels across all categories, while mine output fell by 0.6%. This resulted in a market deficit of 237.7 million ounces, marking the second consecutive annual deficit. The Silver Institute described it as possibly the most significant deficit on record, noting that the combined shortfalls of the past two years outweighed the cumulative surpluses of the previous 11 years.
The trend of supply deficits is expected to continue as silver mine production has declined due to a lack of investment. It can take over 10 years to establish new mining operations, making it challenging to increase production in the short term.
On the other hand, the demand for solar power is growing rapidly, which will drive the demand for silver even higher. The International Energy Agency (IEA) predicts that investment in the solar power industry will surpass that in oil production in 2023.
Silver is a crucial element in the production of solar panels due to its excellent electrical conductivity. Each solar panel requires a small amount of silver, but with the exponential growth of the solar industry, these amounts add up. According to research, solar manufacturers are projected to need over 20% of the current annual silver supply by 2027, and by 2050, solar panel production could consume 85-98% of the global silver reserves.
While some may argue that the industry will find alternatives to reduce silver consumption, the paper suggests that even with such efforts, demand will continue to rise. The photovoltaic industry is essentially recession-proof and is likely to receive ongoing support from governments worldwide, given the priority to combat climate change.
All these factors point to a rapid increase in silver demand with limited supply. Economic principles suggest that higher demand without a corresponding increase in supply will lead to price increases.
Currently, silver is undervalued compared to gold. The silver-gold ratio, which indicates how many ounces of silver are needed to buy one ounce of gold, is over 81-1. Historically, the average ratio has been between 40:1 and 50:1, and it tends to return to this mean over time. The ratio has even reached as low as 30-1 in 2011 and below 20-1 in 1979. When the spread gets wide, silver tends to outperform gold and experiences significant price surges.
Gregersen believes it’s only a matter of time before the mainstream media picks up on the dynamics in the silver market and reports on these developments. Therefore, now may be an opportune time to invest in silver while it is undervalued.
In summary, the impending impact of the photovoltaic industry on silver pricing cannot be ignored. As silver shortages become more evident, it is expected that mainstream media will report on these significant developments, leading to substantial price increases in the silver market. This presents an opportunity to buy silver while it is undervalued.