The risk of a significant silver supply crunch remains low - Metals Focus
While prices are expected to continue to rise through 2021, analysts at Metals Focus said that investors should expect the rally to be on the back of misconstrued information about a lack of physical supply in the marketplace.
"It is important to stress that although the risk of short-term supplies of silver in the required form and location may exist, the risk of an overall global physical silver shortage is extremely low," said analysts at the precious metals research firm in a report published Tuesday.
The analyst noted that while supply chain issues could cause problems with specific investment-grade silver products, these short-term challenges can be worked out. The U.K firm also said that higher prices could lead to funds and retail investors taking profits, releasing more supplies into the market.
The comments from Metals Focus come as the silver market continues to see strong investment inflows into silver-backed exchange-traded products. The increase comes after the market saw record demand in 2020.
While ETF demand is taking physical silver out of the market, Metals Focus said this will not be a long-term factor to drive the precious metal price higher.
"Although ETP holdings are allocated, it is important to appreciate that this does not mean they are unavailable. They remain part of global above-ground stocks of silver and can be easily mobilized," the analysts said. "Although retail investors are less prone to liquidations than institutional ones, were prices to rally sharply, for instance reacting to a short-term tightening in the market, profit-taking would very likely emerge."
Instead of looking at the silver supply, analysts at Metals Focus said that they remain bullish on silver as demand continues to grow, especially silver"s industrial demand as the global economy continues to recover from the COVID-19 pandemic.
"Optimism towards silver"s industrial demand outlook may well encourage fresh inflows. This reflects a post-COVID bounce back and favorable structural factors, such as a shift to green energy and car electrification," the analysts said. "Even though such developments are unlikely to result in a material change in silver"s overall fundamentals, they may continue to stoke investor interest in the metal."
Although Metals Focus is bullish on silver, they also noted that the metal faces some headwinds, including rising bond yields. Wednesday, the yield on 10-year notes rose to a fresh one-year high above 1.4%.
"Growing caution towards precious metals (centering on gold) in a rising yield environment cannot be ignored. On balance, the uptrend in silver ETP holdings should remain firm, albeit at a slower pace," the analysts said.