More than a year after the Reddit-fueled silver short squeeze, dubbed “the world’s biggest short squeeze,” that pushed silver prices to nearly 8-year highs, the metal is trading now near its 2-year lows.
The precious metal recently fell below the psychologically important level of $20 per troy ounce and was trading at around $19.80 per troy ounce at the time of writing.
Not only that, but silver has also tumbled around 26% since its March highs, seen at the start of the Russia-Ukraine conflict, when most precious metals rallied. This is largely due to the escalation of the US dollar (DXY) and the centrEvery bank in the world has been determined to tighten monetary policy to fight high inflation for decades.
Silver just dipped below the critical $20 level
Why is the price of silver falling now?
Silver followed in the footsteps of gold, which recently hit a 5-month low, due to a stronger US Dollar (DXY) and the US Federal Reserve raising interest rates. The US Fed has already raised interest rates by 0.75% in June, with a similar hike looking increasingly likely in July as well.
Additionally, the US central bank also hinted at an additional 0.5% rise in September. This persistent tightening of monetary policy has put precious metals under severe pressure in recent weeks.
According to a report by the London Bullion Market Association (LBMA), silver supply has recovered at a much faster rate than demand, with the biggest increase in supply coming from Latin America. This is largely due to COVID-19 related restrictions in countries like Peru and Mexico, which are among the top silver producers, which were lifted much earlier than the rest of the world.
In 2021, silver production as a by-product of copper mining operations increased by approximately 9%, while primary silver production jumped by approximately 2%. However, demand for silver, particularly jewelry demand among major consumers India and China, has plummeted as in-store jewelry sales have plummeted, due to the closure of a number of number of stores after COVID-19 outbreaks.
Who are the main silver miners involved?
One of Mexico’s largest silver miners, Industrias Penoles, has fallen about 43% from its March 2022 highs as earnings growth lagged other companies in the sector. Fitch Ratings has assigned the company a BBB rating.
Polymetal International (POLY), another major silver miner, has also fallen around 84% since February 2022. The company was first sanctioned by the UK and other countries in actions ongoing against Russia due to the Ukrainian conflict, but is now also facing the brunt of falling silver prices. Currently, the company has a “hold” rating from Berenberg Bank.
Coeur Mining, with operations in Mexico, the United States and Canada, also recently fell to its lowest level in a year, plunging around 45% since April 2022. The company also announced the sale of its shares Victoria Gold at Cormack Securities.
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What is the outlook for silver prices?
China and India together account for about 40% of silver manufacturing demand. While the COVID-19 situation in India has improved somewhat over the past few months, China is facing a new wave of cases.
China is also currently facing soaring energy prices, which has shut down a number of smelters and factories. As such, the outlook for silver for the rest of the year looks quite bleak, with silver demand even weaker in the short to medium term.
According to the LBMA, this year could also see a drop in demand for silver from industrial use, following growing concerns about stagflation, a scenario of reduced economic growth and increased inflation. This will likely lead to reduced sales of electronics and automobiles, which are driving huge industrial demand for silver.
Mining production in Latin America, in particular, is expected to continue to rise, with global mining production expected to rise by around 3% this year, led mainly by Mexico, Peru and China. This should drive silver prices further down, at least in the short term. However, lower supply from Kazakhstan, Russia and Australia should put a floor on prices, stabilizing the outlook for silver somewhat.
According to ANZ analysts, silver prices could settle around $26 per troy ounce by the end of the year. Although a number of silver miners are also expected to cut production forecasts due to rising energy prices and weak demand, the second half of the year should be better than the disappointing first quarter. . The rise of the photovoltaic industry could also play an important role in the increase in silver prices.