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Supply Problems Could Continue to Support Silver ETF Rally

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Silver prices and related exchange traded funds have surged on improving fundamentals with demand-side support due to the coronavirus uncertainty, stimulus measures, and recovering industrial sector. On the other side, supplies are dwindling as well.

The iShares Silver Trust (SLV) jumped 61.5% over the past three months with Comex silver futures now trading around $25.0 per ounce.

Supply disruptions have also helped fuel the rally in silver markets. Mines in Peru and Mexico, which make up almost 40% of world supply, have shut down en masse earlier this year as a result of the Covid-19 pandemic, Bloomberg reports.

While much of the industry is turning the lights back on, some mines have had to shutter operations again due to the Covid-19 resurgence.

Among the second wave of shutdowns are “some of the biggest silver producing mines in the world and it’s drastically reduced the expected silver output for this year,” Paul Wiggers de Vries, senior analyst at CRU Group, told Bloomberg, adding that prices of the metal is expected to keep rising.

Colin Hamilton, managing director for commodities research at BMO Capital Markets, anticipates the pandemic will likely to continue disrupting supply.

“We still have a high number of cases and that could lead to local lockdowns again,” Hamilton told Bloomberg.

The Silver Institute now projects a small market deficit for the first time in five years. The Institute expects a 13% decline in mined production out of Latin America this year while global supply could shrink 7.2%, according to Executive Director Michael DiRienzo.

The negative supply outlook due to longer-lasting mine disruptions adds further support to a precious metal that has rallied over 30% in the past month. Similar to gold, silver is held as a safe-haven asset, but it also has wide industrial uses in products such as solar panels.

Looking ahead, as more mining operations return, the silver market gains could be capped. Most of the silver produced comes as a byproduct in copper, gold, zinc, and lead mines.

“There are huge producers that aren’t really silver mines,” Wiggers de Vries added. “So, that kind of becomes one of the risks for silver supply going forward.”

For more information on the precious metals market, visit our precious metals category.

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