Greentech demand, supply constraints likely to fuel silver's bull run

Around 60% of the total demand for silver comes from industry. Industrial demand has increased considerably in recent years

Silver has been among the best-performing asset classes year-to-date, outperforming gold. While it has given a return of 24.7 per cent, the yellow metal has notched up 17 per cent.

 

Robust greentech demand

Around 60 per cent of the total demand for silver comes from industry. Industrial demand has increased considerably in recent years. “Silver’s usage in greentech is propelling its industrial demand, especially from the solar and electric vehicle (EV) sectors. It also finds usage in high-end electronics and 5G technology,” says Vikram Dhawan, head-commodities and fund manager, Nippon India Mutual Fund.

While demand has surged, supply has failed to keep pace. “Mining production has been affected by labour shortages and environmental regulations, leading to tighter supplies,” says Navneet Damani, group senior vice-president, head of commodities research, Motilal Oswal Financial Services. According to the Silver Institute’s estimates, 2024 is expected to be the fourth consecutive year of supply deficit.

 

Prices could surge further

Silver’s bull run is expected to continue. Dhawan believes its outperformance may persist due to compelling fundamentals. “Silver’s fortunes in the medium to long term will be tied to the development of the greentech space,” he says.

The biggest positive for silver is climate change. Rising temperatures lead to a vicious circle of hotter summers and rising energy demand, which results in higher greenhouse gas emissions. “Solar energy is likely to be a massive part of the fight against climate change. Even by conservative estimates, the solar industry is forecast to grow over 30 per cent in the next decade,” says Dhawan.

Damani expects the price of silver to touch Rs 1,25,000 per kilogram (from the current Rs 91,555) in the next 12-15 months. His optimism stems from supply-side constraints. “Silver is a byproduct in the production of zinc, lead, and a few other metals. Currently, the production cycle of these metals is not robust. The availability of scrap and concentrates is also low, which may prevent the market from returning to equilibrium before 12-15 months,” he says.

 

Recession could play spoilsport

A few developments may halt the bull run in silver prices. “One is a slowdown in Chinese solar manufacturing, and the second is if Donald Trump gets re-elected as the US president and decides to go slow on the greentech agenda,” says Dhawan.

Once a rate hike cycle ends, the US economy tends to enter a short recession over the next 15-18 months. “If that happens, silver’s price growth could stall,” says Damani.

 

Include this portfolio diversifier

All investors should have some exposure to commodities like silver and gold to diversify their portfolios. “Silver can serve as a store of value, currency hedge, or proxy for the greentech industry,” says Dhawan.

Investors, however, need to be mindful of its nature. “Commodities work in cycles. Investors who enter when prices are touching new highs could be part of the next downturn. They must then be willing to wait until the upward trend resumes after an interval,” says Abhishek Kumar, a Sebi-registered investment advisor (RIA) and founder, SahajMoney.

Investors should not allocate more than 10 per cent of their portfolios to commodities. “Of this, not more than 5 per cent should be allocated to silver. Also, enter this commodity with a horizon of more than five years,” says Kumar.