Silver Enjoys Tailwind from Ongoing Supply Deficit

Mike Maharrey: Greetings, I'm Mike Maharrey, a reporter and analyst here at Money Metals. And I'm here today with Philip Newman. Philip is a founding partner of Metals Focus, a fantastic outfit that produces a lot of great data and analysis on the precious metals markets. He's got multiple years experience in the world of precious metals, and appreciate his insights. How are you doing today, Philip?

Philip Newman: I am very good. And how are you keeping?

Mike Maharrey: We're doing great, and excited to talk to you a little bit. It's been a bit since we last spoke. And I guess the biggest thing that's happened in the interim is we've had the big presidential election, here in the US. And it looks like we're going to have the Trump era 2.0 coming up here. And we've seen a pretty healthy correction in both silver and gold since the election. It seems to be settling out a little bit now. But I'm curious about your impressions of how the Trump presidency may impact the precious metals markets. And a little bit more specifically, do you think anything really has fundamentally changed to justify the sell-off that we've seen? Or is that more of a knee-jerk reaction of investors? Or how do you see this?

Philip Newman: Well, if we handle the correction, first of all, that was the immediate reaction to the election result. I think, in one sense, the markets were quite surprised that the result came so quickly. I don't think anyone was quite expecting that. But I think what we saw there were the markets becoming, quickly, much more hawkish, compared to what the Fed was saying, in terms of the Fed's expectations, principally, for next year. This year, we've only got one more meeting, and one more potential rate cut. But we saw the markets really react, and expectations that Trump's policies will be more inflationary. And we can perhaps get into that in a moment in more detail. But it's quite some time since we last saw the markets become much more hawkish than the Fed's dot plot. I think they moved very quickly to expecting rates by the end of 2025 to be about, if memory serves me, about 75 to 100 basis points higher than the Fed was saying.

So just to be clear, still expecting the Fed to cut rates, just not as aggressively as they had pre-election result. And I think that was the catalyst for the sell-off across gold and silver. And I think we've also got to take into account the speed with which both had risen, more gold than silver. Gold, of course, it's record highs. And I think, although gold had done very well to hold onto those highs, there were record levels. It got there pretty quick. I think the market's got a little overextended. And I think once you have a bit of profit taking, or the upward, that buy-side interest, dissipates, even temporarily, well, then, people start selling into that. Some profit taking. Some will be selling, wanting to get out thinking, "Oh gosh, maybe 2,500 is next." And I think that helps to explain that speed of the correction that we saw.

I think what was really interesting about it is that, on the Friday, we saw gold falling quite sharply. But then it bounced, and we thought, "Well, that's done very well." But then, on the following Monday, it fell off again. And I remember being in New York in mid-November, it was for The Silver Institute dinner. And people I was speaking to in the financial markets in New York, quite a few of those were expecting further liquidations. That, in their view, that maybe the market would struggle to hold at 2,600, maybe 2,500 was the next level. And I think what was really interesting, Mike, is that we held at around the... Although we did bounce below 2,600, that was very short-lived. And we quickly, not did we just get back to 2,600, but, as you saw, back to 2,700 as well. So that was really quite remarkable.

And that was against the backdrop, as far as I could tell, of no... It wasn't as though the markets had repriced what the Fed would do. So in other words, we still had the same expectations of the Fed in place when gold going back up to 2,700, as we had when we saw the correction. So I think that was a very, very long answer, so my apologies, to your question about, was it overdone? A little bit, but I think, also, it was really quite revealing and encouraging that the 2,600 level has held. And we've seen that in late November as well, haven't we? Which I think is really quite interesting.

Mike Maharrey: Yeah, yeah. Yeah, I think so. And you mentioned the Trump policies, and I guess, as we move forward, that's really what we need to focus on as we try to parse out the future. And, obviously, you can't parse it out with any kind of completeness. Because I don't know about you, don't have a crystal ball, but we can make some assumptions. The hard thing about Trump though is that, as we learned in the first four years, it's hard to really predict what he's actually going to do. He talks a lot and, sometimes, the actions don't necessarily match up. You mentioned that we might see some more inflationary policies coming out of this administration. Can you give an idea of what you think those are? Maybe a little bit more specific. I'm assuming probably tariffs is high on the list because that seems to be the thing that's getting a lot of lip service right now.

Philip Newman: Very much so, yes. I would say it's the tariffs and the deportation policies. Now, again, and I very much agree with you, we've got to actually follow what he does, and not necessarily what he says. The only way I'd disagree slightly with that, or I'm going to look at it slightly differently, is on the tariffs. Because although he has come out and said that focusing on Mexico, Canada, and China, some of that is sabre-rattling. It's part of the strategy to maybe get these countries to follow other policies, other America friendly trade policies. And so maybe he won't follow through with all of those proposed tariffs because he will've had a success in other international policies. So I guess that's another way of saying that, just because... Maybe when I speak to you again in a few months time, or even if crystal ball goes the year out, and he hasn't followed through on those tariffs, that won't necessarily be a failure. It could just as well mean that he's had success beating these countries over with that stick of the tariffs, and achieved its aims elsewhere.

But if we take them at face value, at the moment, then they would be inflationary. In terms of the deportation policy, well, numbers vary tremendously. Where's he going to draw the line? No one really knows. And so that could depress growth, if you're taking tax earners out of the country, depending, again, how far he goes with the deportation policy. And, again, taking that hit to the labor force could also be, that tightness, could also be inflationary as well.

So I think, going back to that repricing by the markets of Fed policy, I think that was, the markets had nothing else to go on, apart from what his pronouncements, and it helps to explain that repricing. And as I said, I think those are two of the most that stand out from that inflationary standpoint, or the potential anyway.

Mike Maharrey: Right. What are some other things that you're looking at as we move into 2025 that you see as could be some significant factors that are developing that would impact the precious metals markets, beyond what Trump may or may not do? What are some of the things that you're looking at?

Philip Newman: Sure. There's quite a few things. I guess the safe haven aspect is still exceptionally important. And I think that had something to do, as well, with that run up that we saw in late November. And I think although, taking a step back, things have quietened down in the Middle East, not quiet, but quietened down from a risk point of view, from an investor trying to price risk. We saw things ratchet up in terms of Russia and Ukraine. Ukraine being allowed to, in a sense, use missiles it's taking from the US, or UK, or wherever else, to fire into Russia. The use of the types of missiles by Russia as well. So I think, for quite some time, investors thought they understood that risk. And I think that changed a little bit at least. And so I think that brought some safe haven buying back to the fore. Or I guess to put another way, the safe haven risk buying switched from being the Middle East centric to more Ukraine-Russia centric. So we'll see how that plays out.

Of course, both aren't going away anytime soon. Trump, most likely, will support Netanyahu. That could embolden him as well. So we'll see how that plays out. We'll see how things play out with Iran as well. Trump, most likely, will take a more hawkish stance there. That could ratchet up again. So I think the safe haven element is certainly one that we're looking at. China as well, from a growth standpoint, has certainly been struggling. So we'll see how that one also affects global trade. So I think there's quite a lot out there from that point of view. Those are very gold specific. And, I guess, there are other elements or other, I guess, areas that we would think about on the silver side as well.

Mike Maharrey: Mm-hmm, mm-hmm. What are some of those areas on the silver side?

Philip Newman: I think for silver, so as you know better than anyone, silver behaves both as a precious metal, as an industrial metal. And so everything I've just said can apply to silver. I think it has struggled a little bit. You see the ratio overall still in the mid-eighties. So I think some investors have been disappointed by that, and that could encourage them to be shunning silver. But at the same time, when gold does really well, there could be some investors going, "Well, maybe we'll see... There isn't much more upside to gold to come. Let's go turn our attention to silver." Even as we talk now, it's just flirting with a $31 level. Can it hold onto that? It's been a couple of weeks since it's been at that point. So I think it is going to be range-bound between, say, the 31 and the 30 level. And that, in itself, can discourage investors. It doesn't seem very exciting, reasonable liquidity, that's not great.

And I guess one area of the market that we are looking at, Mike, is the coin and bar side. And, really, there's, I guess, a couple of things there. One, if you've got price stability, that's just not great for demand. Retail investors, dealers, they do better when you've got price volatility.

I think the other thing which is really interesting, I guess it's more US centric, is that investors, they tend to, overall, be more Republican-leaning. And so I think now that, not just having Trump in the White House, but having the Senate, having the Congress, having a majority on the Supreme Court, wherever you look, it's Republican-leaning or Republican strength. So I think that gives those investors confidence that the direction of travel for the US, not just the economy, but for the US socially and politically will really be in their wheelhouse. And so that maybe is a reason that maybe that means they won't be buying precious metals as much as they've done in recent years. It doesn't mean they're going to be selling, but I think it could mean that there's less urgency. Because how they live, and what they see on the news, it will really give them confidence and reassurance about the direction for the US economy and for US society.

And if we look elsewhere, Germany, historically, is one of the really big coin and bar markets for silver. That's been struggling for a couple of years now. So that's one we're keeping a close eye on to see if that has a better year in 2025 or not.

Mike Maharrey: Yeah, I think that's a really good overview of US sentiment. I think you hit the nail on the head with a lot of those points. You guys recently, partnering with The Silver Institute, released the... I don't know if it's a mid-year, late, mid-year projections for 2024 in the silver market. And it looks like we're heading toward another record in industrial demand, eclipsing 700 million ounces for the first time. So that's pretty exciting from a demand standpoint. How do you see things playing out as we get into the next year though, as far as the market deficit goes? I'm assuming that we're looking at another market deficit. And then, how do you see that coming into 2025?

Philip Newman: Sure, you're absolutely right, yeah. So, as you mentioned, as I touched on earlier, I was over in New York. So what The Silver Institute does is, in November, it's our flash estimates for 2024. And then, in April, we return and present our findings for the final figures for 2024 in World Silver Survey 2025, as it's called. So although we do have these estimates, I would suspect that quite a few of these figures will change. Our job is to get out in the market, meet people. There was still a good few weeks... Although it was mid-November, we had to sign off on the numbers in early November, so it's almost two months worth of numbers that weren't out. So we'll see how those changes... Especially the price sensitive areas like coin and bar, all parts of the Indian market, which can hit jewelry and silverware. There's quite a lot out there. And because India is number four globally for industrial demand, that will also impact the industrial total as well.

So to get back to your point, yes, we are calling, at this point in time, industrial demand globally getting through 700 million ounces, which is really quite staggering. That is quite an impressive total, given that it's only a couple of years ago, 2022, where it was below 590. So that is a really remarkable performance. So going back to the things we're looking at, the industrial is certainly up there.

And within that, one of our favorite topics that also gets a lot of attention, is the photovoltaic market, the solar market, which has just been going remarkably well. China accounts for roughly half of global installations. So that remains an exceptionally important market. Where we are looking at very closely is the rate of thrifting that we see. So you think about a solar panel, can you, give or or take the same level of efficiency, use less silver than you did last year or the year before? And that is certainly a focus of the market. Bear in mind, also, although I said China is roughly half of global installations, it dominates the manufacturing of the panels. So it's really important that we go into mainland China and speak to the panel guys. And we've got a guy in Taiwan that is over there. He goes to the PV conferences, speaks to the paste and powder, and the panel guys.

And that's really important because it's only when you're face to face with them that you really understand their business model, the opportunities and headwinds that they face. And then you start to understand how they thrift, why they thrift, and just how that progresses. And it's never ending. And I think this year is definitely one of the highest rates of thrifting we've seen for some time. Silver at $30 basically means that more of the... Rather, let me rephrase that, silver accounts for more of the total panel cost than it did when silver was, say, $25. And so that creates pressure. Basically, these guys struggle to pass on those higher costs to their margin falls. So what do they do to protect their margin? They cut costs. And silver is not the only one they target, don't get me wrong, but silver is certainly part of that strategy. Yeah, so it's an ever present part of the market.

Because I'm often asked, Mike, that, well, people can understand it when silver is 50 bucks, and people want to thrift. But silver was 25 or 28, really? But the industry remembers 50 bucks, and silver is a volatile metal normally. So you want to do everything you can to control your costs. And so the thrifting, it's just part of the market. It varies each year, but I think this year it has been quite aggressive.

Mike Maharrey: When people hear market deficit, I think it can create the impression that there's no silver. And, obviously, they're covering that shortfall. Can you give a little bit of insight into how the market deficit is covered? And maybe a little bit of a sense of, is there enough silver above ground to make up these deficits as we move into the future? And how does that work?

Philip Newman: Yeah. Well, just to go back a stage, when you asked earlier about what are we looking at for next year, the deficit is certainly one of those things. And that's being driven by the strength of industrial demand. So our latest estimate that, again, when we were up in New York, for this year is about 182 million ounces for 2024, so very close to last year's 189. Now, they're both down on the record which was 2022, which was 261 million ounces. But, really, I wouldn't use that as a benchmark. These are still very, very significant deficits. And at this point in time, we think the deficit would also be quite significant, maybe not as high as this year, but it could still be quite reasonable.

So where does that metal come from? Well, what's really interesting this year is that quite a few refineries, be it in the US, or taking a step back, North America, and in parts of Europe, have really been full of silver. There has been silver that's been liquidated by retail investors. You've had flatware being sold back. So this has come from, I guess, you can call it above ground stocks. The coin and bar is retail holdings of investment products, and the flatware is obviously held by consumers as well. So this year's been quite interesting that you have had some of the shortfall of the silver, the deficit, met by that metal that's been sold back, either by consumers or retail investors. Now, I'm not going to say that of that 180-odd million that's been overwhelmingly no, but I would say it certainly played an important role this year.

Where's the rest of it come from? That's a really good question. I can tell you where it really hasn't come from, manner of speaking. You've had a rise in CME stocks. I believe that LBMA holdings, in their vault, or holdings of good delivery silver in London vaults has been quite stable this year as well. So all of that suggests that the silver has come from off exchange holdings. So that has been quite interesting.

And just to give you a couple of figures, just to help, if we look at... Because we've got to think about this is on exchange because that's identifiable. And when we say exchange, that's the CME. You've then got the two exchanges in China, so the Shanghai Gold Exchange and the Shanghai Futures Exchange. And then there's a little bit in Japan and India. So if we add those exchanges with the silver that's held in London, so at the end of last year, so end of 2023, if I round these figures for you, you had 1.2 billion ounces. The latest figures for the end of October, you had 1.3 billion. It's gone up, which is really fascinating.

So that's why I said earlier that the deficit isn't being filled by those. So it's coming from other sources. Maybe it's coming from Loco Zurich. It's possible. There's a lot of silver held in Zurich. The challenge with the Zurich silver is while I would say the vast, vast majority, vast majority, is in large bars. So it'd come back to the market really easily. But a lot of that is held really quite tightly by high-net-worth investors, by family offices. And for those, $30 silver, I don't think is that exciting. I can't tell you what price they would release, but I just don't think it would happen so much at $30. So maybe some of the silver that's coming into the market is coming from non-CME held silver in the US, if you can follow that?

Mike Maharrey: Yeah.

Philip Newman: That's a possibility. I think there's quite a lot there. Again, I think a lot of that is quite sticky. For example, the silver held in IRAs, there is a lot of silver held in the States in these accounts. And, again, that's very sticky. I don't think that's going to come out. So maybe there's more coin and bar coming out than we realize is a possibility. Maybe it's coming from Loco Singapore. There's all sorts of places. And, by definition, it's pretty opaque. It's not transparent. It's hard to identify. So it's really quite interesting. So I think the deficit is being filled, I think, as I said, mainly by off-exchange sources, sources that aren't identifiable, or easily identifiable.

Mike Maharrey: That's interesting. My takeaway from that, and tell me if you think this is a fair summation, there's plenty of silver out there, but it really depends on the price. It's like my house. My house isn't for sale, but somebody offers me the right price, it's for sale. So if you get a price that's high enough, you can get that silver released into the market, but it's not necessarily going to flow out there at $30. Is that a fair summation there?

Philip Newman: Yeah, I think that's fair. I think where it gets really interesting, you think of someone like India. So India is the largest market for jewelry. It's the largest flatware market. I mentioned earlier, it's fourth-biggest industrial. It's probably, now, probably the largest market for investment bars as well. There's a lot of silver held in India by retail investors. Let's put industrial to one side, but by retail investors, or by consumers. And bear in mind, even their jewelry or flatware, that's all going to be... Yes, it's sterling silver, like in the US, but the markups are infinitely lower than the States. And people understand what they buy. So from a price point of view, it's fairly near market.

And the silver price in India this year has been a record high. What's been really fascinating is that it's been a record high, but we haven't had mass liquidations. We had that a few years ago, but we haven't seen that. We've had demand weaken, yes, as you'd expect. It's a price sensitive market. But it hasn't collapsed. So that's been really quite interesting. So that's why, sometimes, it's important to look at the price of silver in local terms. And rupees is the one that we certainly do, and you know that, and helps because we've got an office over there as well, in Mumbai, that we can do that. But it is been fascinating that you haven't had that collapse.

But whereas to your point, yeah, I think if silver was to get through, let's pick a price, 40 bucks, I think that would be really interesting. I think, for the US market, for retail products, you could have a lot more liquidations. But, equally, I think there'll be people buying into that, thinking, "Well, we've made 40."

Mike Maharrey: Right, here we go.

Philip Newman: Exactly. I may not believe in 50, but I could well believe in 45. So I think you could get a very good market from a dealer point of view, a much better or healthier two-way market there. So that is a possibility, but we shall see how that one plays out, to be honest.

Mike Maharrey: Well, I'm going to let you get out of here. I know it's late over in your part of the world. And I definitely appreciate you taking a little time to chat. Where can folks go follow the work of Metals Focus? And they should do that because this is where you're going to get this real, data-driven... And not just data-driven, but also, as you've alluded to, you've got folks all over the world that are right there, boots on the ground, so to speak, talking to folks, and having your pulse on the precious metals market. So how can people follow what's going on over there at Metals Focus?

Philip Newman: Sure. Well, head to metalsfocus.com, you'll find our contact details. That will help you to get in touch with us and to get samples. So, as you mentioned, we do work for The Silver Institute, but we also do short and long-dated forecasts. And for those of your people listening to this that are interested on the mine side, we do a lot of work on the mine costs, and doorway flows across the precious metals. I think that's the interesting thing. We are focused exclusively on precious metals. And the fact that we don't trade the markets, I think helps us to have quite an independent view of what's going on.

Mike Maharrey: Right, right. And we use your work a lot. I definitely use it in research and crafting articles, and really appreciate the... Like you said, it's good, unbiased information. It's not somebody with an agenda. You guys are just looking at what's out there, and crunching it, and giving us really good data. So we definitely appreciate it. And I, again, appreciate you taking time out of your day to chat with me, and get your insights off the top of your head, so to speak.

Philip Newman: Well, thanks again, and happy holidays to you and to everyone listening.

Mike Maharrey: Likewise. Thank you so much again.