Commodity Watch: When Silver's in Short Supply

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>In the early 15th century, Europe ran out of silver. It had used its locally produced silver to buy spices and silks from the Levant, but European mines were producing less, causing severe shortages. By 1420, Europe was relegated to using other commodities for trade or reverting to barter (Germans previously used pepper as currency). These metal shortages caused a century-long recession across most of Europe.</p><p>Today, governments print money. &nbsp;Yet, metal shortages are increasingly evident which could cause industrial and monetary disruption. This month, shortages in physical silver in both Europe and Asia (relative to stored amounts in the US) caused a spike in its price. The spot premiums for London and Shanghai were $3 and $8 per ounce higher than New York futures, respectively. Exceeding standard insurance and transportation costs. Concurrently, lease rates (the interest rate to borrow physical silver), which are also a measure of how tight the market is, touched 30% on an annualised basis – an all-time high. Typically, that rate is 2-4% or lower. The demand for physical silver was so high (driven perhaps by a short squeeze) that it was being flown to London from the US (a practice usually reserved for gold). In India, one of the largest refineries ran out of silver, for the first time ever, ahead of Diwali.</p><p>Silver is no longer a medium of exchange, but it has become an increasingly important part of our economy. Its high level of electrical and thermal conductivity makes it essential for electronics, batteries, medical equipment, electric vehicles and solar panels (as the second highest cost in a Photovoltaic (PV) cell). In addition, demand for silver is increasing as part of the ‘debasement trade’ as investors try to hedge against a USD devaluation. However, physically backed ETFs are effectively silver black holes because they buy silver to meet demand but make it difficult for customers to redeem the product leaving all that silver in vault. In effect, they are taking silver off the market. At the same time, there’s been a primary supply shortage of silver for the past five years; ergo the price increase of over 70% this year. Supply is hard to increase. 72% of silver is a byproduct of other metals such as gold, zinc and lead with a few pure plays, which limits quick supply increases. Yet, electrification, debasement and green capex are only increasing demand.</p><p>Silver’s story is not unique here. After a decade of underinvestment in mining, metal production is tight, and supply chains are susceptible to disruption (see nickel). That has been good for miners. Cash flows are up, and stock prices are higher (XME is up approximately 75% year-to-date). Yet ultimately these shortages and fragile supply chains are not sustainable. Additional investment will be required to meet the ever-increasing demand for the metals and minerals we need. That should be a boon for early movers that capitalize on the higher prices before additional supply (likely 7 to 10 years away) lowers prices yet again.</p><p><br></p>