Since the beginning of 2021, the price of COMEX silver futures has continued to rise moderately. As of February 18, 2021, COMEX silver futures traded at $27.250 an ounce, up 3.15% since the start of the year. For the follow-up silver price trend and investment strategy, we believe that with the accelerated landing of novel coronavirus vaccine, global economic repair into the fast lane, silver downstream demand is expected to be fully repaired, the driving force of silver upward in the short term is mainly from the recovery of the demand side. However, we also need to point out that the long-term industrial demand of silver is shrinking, and the current recovery in demand may be "short-lived" and more moderate.
Industrial attribute supports the strengthening of Silver Price
Overall, COMEX silver futures prices have continued to rise moderately since the beginning of 2021. As of February 18, 2021, COMEX silver futures traded at $27.250 an ounce, up 3.15% since the start of the year.
From the performance of silver prices inside and outside, since the beginning of the year, the price of silver futures in the outer disk is slightly stronger than that in the inner disk. As the RMB exchange rate continues to strengthen against the US dollar, RMB appreciation suppresses the price of silver futures in the inner market, and the trend of the price of silver futures in the inner market is weaker than that in the outer market. As of February 18, 2021, the main contract of silver futures in the inner market was 5599 yuan / kg, down 1.43% since the beginning of the year, and the price of silver futures in the inner and outer market was down 2.43%.
In terms of precious metals, silver prices continue to outperform gold prices. The depletion of dollar flows in March 2020 led to a collapse in precious metal prices, with gold and silver surging to an all-time high of 125. Subsequently, gold and silver prices both rebounded, silver price elasticity is greater than gold, gold and silver ratio continues to weaken. After entering August 2020, precious metals prices fell as US bond yields bottomed out. However, due to the strong industrial nature of silver, the price of silver is more resistant than the price of gold during the economic recovery, and the ratio of gold to silver continues to weaken. As of February 18, 2021, the gold and silver ratio of COMEX recorded 65.67, with a cumulative decline of 8.49% since 2021.
In the long historical period before the modern industrial revolution, like gold, silver was mainly used as money and jewelry production, rarely used in other industries. However, with the progress of the industrial revolution of human society, especially after the human society has entered the electrical era, due to the good electrical and thermal conductivity, the industrial application scene of silver is expanding rapidly, and its industrial demand is also growing rapidly. The period from 1980 to 2000 was a period of rapid growth in demand for silver industry, with demand rising from more than 300 tons to more than 900 tons, with an annual compound growth rate of nearly 6 percent. At present, the industrial demand for silver (including the jewelry processing industry) accounts for more than 80% of the global silver supply, while the corresponding seigniorage investment demand is relatively low, accounting for less than 15%.
In 2020, COVID-19 epidemic ravaged the world, which had a very serious impact on the global economy. After more than a year of struggle, great progress has been made in epidemic prevention. In the post-epidemic era, the global economy has gradually entered the fast lane of recovery, and the growth rate of commodity demand has accelerated. Driven by the dual factors of demand recovery and monetary easing, the prosperity of the commodity market is high.
At present, with the acceleration of vaccine landing, the number of new cases of COVID-19 continues to decline around the world. According to CDC data, as of February 17, local time, about 40.3 million people in the United States had received at least one dose of COVID-19 vaccine, of which about 15.5 million had completed the vaccination. Statistics released by the European Union show that 22 million people have been vaccinated in the European Union since COVID-19 was vaccinated at the end of December last year. With the acceleration of COVID-19 vaccination around the world, the number of new diagnoses and deaths continues to decline. According to the latest global epidemic weekly report released by the WHO, there were about 2.7 million new confirmed cases worldwide in the week ending February 14, down 16% from the previous week and maintaining a downward trend for the fifth consecutive week. The number of new deaths was about 81000, down 10% from the previous week and showing a downward trend for the third week in a row.
At the same time, monetary conditions are expected to remain loose for quite a long time. Fed officials agreed to maintain loose monetary policy for a long time to come to help the US economy recover from the epidemic, according to the minutes of the Fed's January monetary policy meeting released on February 17.
Against the backdrop of stronger commodity sentiment, we believe that the driving force behind the rise in silver prices in 2021 will mainly come from the demand side rather than the supply side, and the demand side driving force is relatively "short-lived and moderate".
From the perspective of global silver supply, the domestic silver mine production of Mexico and Peru, the two largest silver producers in the world, dropped sharply due to the impact of the epidemic. However, as the epidemic situation has been gradually brought under control, the monthly output of silver mines in the two countries has rebounded steadily after the resumption of work in the two countries, and has basically returned to the pre-epidemic level. In November 2020, Peruvian silver production was 294500 kg and Mexican silver production was 308000 kg, with an average monthly production of 321500 kg and 296600 kg respectively in 2019. After entering 2021, we expect the tight supply of global silver to ease gradually.
At present, in the silver demand structure, industrial demand accounts for the highest proportion, and the remaining sector demand includes jewelry, silver coin and silver bar investment and silver utensils demand. As far as physical properties are concerned, silver not only has good electrothermal conduction properties, but also has high photosensitivity and luminous properties, so it is widely used in a variety of industrial fields. its downstream applications include electronics and electricity, photosensitive materials, photovoltaic, catalysts, printing electronic technology, nano-silver (medical, cosmetic, food, etc.), medicine, battery and other fields. In the downstream applications of silver, electronic and electrical demand is the largest, accounting for nearly 45% of industrial consumption, followed by photovoltaic demand, accounting for about 14%, alloy smelting and photosensitive material demand accounting for about 10% and 7%, respectively.
Silver industry demand has continued to decline since 2017, with global silver industry demand peaking at 517.2 million ounces in 2017. By the end of 2019, silver consumption demand for the whole year was 510.9 million ounces, down 1.22% from the peak. And affected by the epidemic in 2020, global silver industry demand is expected to be 475.4 million ounces, a further decline. The rapid development of silver substitution technology is the main reason for the decline of silver consumption in industry. As silver is a precious metal and has a high cost to be used in the industrial field, the continuous development of silver alloy composites and silver matrix composites can greatly reduce the use of silver and reduce the production cost of enterprises.
However, the global economy has recovered from the impact of the epidemic in 2021 and has gradually entered a period of accelerated recovery. In the context of the global economic recovery, silver demand in all industrial sectors will usher in a "temporary" rebound. At present, the driving force of the silver market is mainly from the demand side, but this driver as a whole is more moderate. In addition, the International Silver Association predicts that the demand for silver in photovoltaic and other new energy areas has basically reached its peak and may decline in the future.
The capital end is stronger than gold, but it is not advisable to be overly optimistic.
From the perspective of market funds, the trend of silver is stronger than that of gold, but it is still not advisable to be overly optimistic. In August 2020, the world's largest gold ETF--SPDR position and gold price Synchronize peaked, after that, ETF position continued to decline, market funds continued to flow out of the gold market, which also reflects the pessimistic performance of market funds for gold in the future.
In sharp contrast, the silver ETF position basically showed a horizontal oscillation after August 2020, and increased significantly in the silver short market in 2021. At present, although the position of Silver ETF has fallen somewhat, it is still much higher than in August 2020. In fact, the difference in ETF positions between the two reflects that the market is relatively bullish on silver during the economic recovery.
The "siphon effect" of digital money funds suppresses the price of silver
Since 2020, the bitcoin market has been actively traded, and the price of bitcoin has increased nearly fourfold in a short period of time. At present, the price of bitcoin has exceeded 53000 US dollars per piece, and the size of the market is close to trillion US dollars, which is comparable to gold. In fact, Bitcoin is known as "digital gold" because it has similar functions as precious metals in hedging the decline in the creditworthiness of credit currencies, but it also has many incomparable advantages over gold. for example, cross-border capital transfer, partial payment function, good concealment and so on.
In fact, in the past, Bitcoin and precious metals prices tended to have similar trends, but after August 2020, the gap between Bitcoin prices and precious metals prices is very clear. This is reflected in two aspects: from the price point of view, the price of gold and silver hesitated after August 2020, and the price of gold even entered the adjustment channel, but the price of Bitcoin quadrupled in less than half a year; from the capital side, the global stock of funds continued to flow out of the precious metal ETF, while the scale of digital currencies such as Bitcoin continued to grow steadily, and the capital "siphon effect" was very obvious.
We believe that the rise of digital currencies such as Bitcoin is a new challenge to traditional safe havens (gold and silver) and needs to be included as a new variable to analyze the future trend of precious metal prices. At present, this capital "siphon effect" is not over and continues to deepen, which is undoubtedly negative for precious metal prices.
The unilateral long strategy still faces some risks at present.
For the follow-up silver price trend and investment strategy, we summarize from the following aspects:
From a fundamental point of view, the supply side of silver has been basically repaired, and the supply of the two major global silver producers in South America, Mexico and Peru has been basically repaired; on the demand side, with the accelerated landing of the vaccine, the global economic repair has entered the fast lane, and the demand downstream of silver is expected to be fully repaired, and the upward driving force of silver in the short term is mainly from the recovery of the demand side. However, we also need to note that the long-term industrial demand of silver is shrinking and that the current recovery in demand may be "short-lived" and more moderate. Therefore, from a fundamental point of view, we are cautiously bullish on the follow-up of silver prices.
From the perspective of silver monetary attributes, we think that silver still faces the capital "siphon effect" of digital currencies such as bitcoin, which has a negative impact on silver prices. At present, the differentiation of silver and bitcoin ETF positions can also confirm this judgment from the side, and this differentiation has not yet seen a balance, and the impact of this "siphon effect" may last for quite a long time.
From the perspective of investment strategy, the strategy of unilaterally long silver still faces certain risks (during the upward stage of US bond yields, silver is suppressed because of monetary properties). We think that from the current situation, the investment strategy of being long silver and shorting gold is more appropriate, which can earn the income brought by the strong industrial attribute of silver in the period of economic recovery. It can also partially avoid the negative suppression of the current strength of US Treasuries and the dollar on the monetary attributes of precious metals.
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