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Physical silver demand to hit record highs but ETF outflows dominate the price action

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(Kitco News) - Weak investment demand for paper silver products and exchange-traded funds have pushed prices into a steep downtrend through most of 2022.

However, despite the weak price action, there is fundamental strength in the precious metal as physical demand looks to end 2022 at record levels, according to the latest report from the Silver Institute.

In an interim report published last week as part of the Annual Silver Industry Dinner in New York, the Silver Institute said that global silver demand is expected to hit a new record of 1.21 billion ounces this year, rising 16% from 2021.

“Each key segment of demand, except photography, is set to post a new peak,” said the analysts at Metals Focus, the author of the latest report.

In a breakdown of the silver market, the British research firm said that industrial demand is forecasted to grow to 539 million ounces this year. Industrial demand continues to be driven by the global green energy transition, growing demand for electric vehicles, and increased adoption of 5G technologies.

At the same time, physical investment demand is expected to rise to 329 million ounces, increasing by 18% compared to last year. There has been an insatiable appetite for silver bullion products, with premiums on coins rising to record levels, hitting nearly 100%.

“Support has come from investor fears of high inflation, the Russia-Ukraine war, recessionary concerns, mistrust in government, and buying on price dips,” the report said.

Analysts note that India is leading the world in silver demand. Last month at the London Bullion Market Association annual precious metals conference, analysts said that India is expected to import 10,000 tonnes of silver, double the average imports from the last five years.

While demand for physical silver hits record highs, investor interest in silver-backed exchange-traded products has set another type of record.

Metals Focus said that silver holdings in global ETFs are expected to drop by 110 million ounces, representing the most significant annual outflows on record.

“Institutional investors are expected to retain a bearish stance as real yields are likely to strengthen, encouraging further distance from the white metal,” the analysts said.

The biggest factor impacting silver prices remains the Federal Reserve’s aggressive monetary policy stance. Shifting expectations on the pace of the central bank’s rate hike helped silver prices rally more than 21% in the last two months, pushing prices briefly above $22 an ounce.

However, although the Federal Reserve may slow down its rate hikes starting with a 50-basis points move next month, markets still see an elevated terminal rate above 5%.

Metals Focus has a relatively bearish outlook on silver. The research firm sees silver prices falling 17% in 2023, with an average annual price of around $21 an ounce.

Gold prices to fall 10%, silver prices to fall 17% in 2023 - Metals Focus

The analysts see silver underperforming gold next year as recession fears also impact the precious metal’s industrial usage.

“Growing fears over a possible recession will weigh on sentiment, despite its extremely favorable fundamental backdrop,” the analysts said.

Along with rising physical demand, Metals Focus highlighted fundamental supply/demand imbalance as mine production remained fairly flat in 2022. The report said that silver supply is expected to increase by 1% to 830 million ounces this year.

“The global silver market is forecast to record a second consecutive deficit this year. At 194 Moz, this will be a multi-decade high and four times the level seen in 2021,” the analysts wrote. 

“Output from Mexico will rise most significantly as several major new silver projects that have come online in recent years continue to ramp-up to full production rates. By-product silver production from existing mines and new projects in Chile will also be a major contributor to growth.” They wrote that  lower output from major silver producers including Peru, China, and Russia would partially offset these increases.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.