As silver soars, HSBC's heavyweight report explains: why it may have risen too much already

Looking back at 2023, the silver price experienced significant fluctuations. Due to concerns about global economic slowdown, the silver price hit a yearly low of $19.88 per ounce on March 10th. However, on May 5th, the silver price rebounded to a yearly high of $26.13 per ounce. Despite the large volatility, the silver price basically returned to the level at the beginning of the year by the end of the year, with a closing price of $23.76 per ounce on December 29th, only $0.17 lower than the $23.93 at the beginning of the year.

In 2024, despite a recent pullback in the silver price, driven by the repeated highs in gold, the silver price has already achieved a significant rebound this year. So, is the silver price already overvalued?

On May 7th, James Steel, Chief Precious Metals Analyst at HSBC, released a latest research report stating that in 2024, with the decline in gold prices, the silver price will also experience a slight pullback. From the demand side, due to the strong growth in industrial demand for silver (especially in the photovoltaic and electronics industries), it will support the stability of the silver price in 2025, limiting the downside of the silver price.

On the supply side, firstly, silver production is expected to steadily increase from 2024 to 2025. Secondly, as a by-product of metal mining, the increase in production of basic metals such as gold, lead-zinc, and copper will boost silver supply. Thirdly, the recycling volume of silver is expected to reach a high point this year, becoming the second largest source of silver supply after mining in nearly a decade.

HSBC predicts that in terms of supply and demand relationship, there was a deficit of 136 million ounces in the silver market in 2023, but the deficit in silver supply and demand will expand to 200 million ounces in 2024, and remain at the level of 197 million ounces in 2025. This deficit will help prevent a sharp decline in the silver price, but it is not enough to support a long-term bull market.

From a sentiment perspective, the Federal Reserve and other central banks may not cut interest rates as quickly as previously expected, the US dollar is expected to strengthen, which may also suppress the rise in the silver price.

Therefore, HSBC has moderately raised its average silver price forecast for 2024, from $24.33 per ounce to $25.38, and expects the price range for silver this year to be between $22.00 and $30.00 per ounce. The average silver price forecasts for 2025, 2026, and the long term remain unchanged, at $25.50, $26.20, and $24.00 per ounce respectively. The forecast prices at the end of the year are $24.90 per ounce for the end of 2024, and $25.80 per ounce for the end of 2025.

From the demand side, strong growth in silver's industrial demand will support the silver price

Firstly, HSBC points out that in the long term, silver's industrial demand is expected to remain strong in the coming years (especially in the photovoltaic and electronics industries), which will limit the decline in the silver price this year and support the stability of the silver price in 2025:

Despite the global industrial growth slowdown, thanks to the widespread use of silver in the photovoltaic and semiconductor industries, silver's industrial demand has significantly increased in the past year. According to the Silver Institute, silver's industrial demand increased from 588 million ounces to 654 million ounces in 2023, an increase of 66 million ounces. Moreover, the strong global sales in the semiconductor industry have also driven this growth The electronics industry is an important pillar of silver demand. With the recovery of microchip production and the development of new AI applications, we are optimistic about the prospects of the electronics industry and silver demand. Global consumer electronics market revenue is expected to exceed $1 trillion this year, with a double-digit growth rate compared to 2023. Global semiconductor capacity is expected to increase by 6.4% in 2024. In addition, the adoption of global 5G networks may further boost the demand for silver.

Other factors driving industrial demand include an increase in automotive demand, as silver is used in electronic products and computer components for cars. Additionally, other traditional sectors such as ethylene oxide production and brazing alloys continue to show strong demand for silver.

In terms of regional distribution, HSBC expects silver demand in the United States and Japan to remain flat compared to last year, but to remain strong in other regions. For example, industrial demand for silver is expected to grow above average in emerging markets such as India and Southeast Asia.

Although HSBC's Global Chief Economist Janet Henry predicts global industrial growth of only 2.2% this year and 3.1% next year, below the long-term average. On the surface, these overall growth figures suggest weak silver demand this year and next. However, we expect the demand for silver in the market to be much better than the overall data indicates. We anticipate strong industrial demand for silver this year and next, with growth rates of 3.8% and 4.0% respectively.

Secondly, HSBC believes that from 2024 to 2025, global demand for silver coins and bars is expected to decline, with several key factors influencing this trend:

Firstly, many retail investors have purchased a large amount of silver coins and bars in recent years, and currently have little interest in further increasing their holdings. Especially in the U.S. market, after experiencing strong demand in 2023, the market for silver coins and bars may be nearing short-term saturation.

Secondly, the continued high silver prices and premiums, especially in India where local prices have risen due to currency depreciation, have increased the cost of purchasing silver coins and bars, further suppressing purchasing willingness. Moreover, high silver prices have led to more silver coins and bars flowing into the secondary market, reducing the demand for newly minted silver coins and bars.

Furthermore, although global inflation still exists, it is gradually easing, reducing investors' demand for hard assets like silver.

At the same time, the higher returns on bank savings products provide investors with more attractive options for storing funds, competing with silver coins and bars.

Additionally, India's import tax policies and investors' fatigue with long-term geopolitical and economic uncertainties may further suppress new purchases. India's import tax policies may limit silver demand, especially for small and large silver bars. Of course, if there is an increase in demand for silver from Exchange-Traded Funds (ETFs), it may boost the demand for large silver bars.

After five consecutive years of growth, including silver coins and bars, demand reached a record 337 million ounces in 2022, but in 2023, total investment demand for silver coins and bars decreased by over a quarter, falling to 243 million ounces As a result, looking ahead, HSBC expects global silver coin and bar demand to decline to 221 million ounces in 2024, with a slight rebound to 225 million ounces in 2025.

Thirdly, HSBC stated that the outlook for silver demand in the jewelry industry is not optimistic. Silver also plays a role in jewelry manufacturing. Although high gold prices may indirectly push up silver prices, attracting some jewelry manufacturers and consumers to turn to silver jewelry, high silver prices may hinder consumers from purchasing silver jewelry, suppressing some demand.

From the supply side, global silver production is expected to steadily increase over the next two years.

1. Although silver mine production declined slightly in 2023, global silver mine production is expected to increase significantly this year and in 2025, with production growth mainly coming from Mexico, Peru, and Bosnia and Herzegovina:

HSBC pointed out that silver is mainly obtained through direct mining and as a by-product of mining. While most silver mining areas maintain strong production, there are exceptions. For example, Mexico's Newmont company's Peñasquito mine suspended production due to a long strike, leading to a potential reduction of about 10 million ounces of silver production in the country. Production in Argentina and Russia has also decreased due to lower ore grades and the closure of some mines. However, production in Chile has increased significantly by about 10 million ounces, partially offsetting these declines.

Several projects under construction are expected to start, including the Vares project in Bosnia and Herzegovina, the Terronova project in Mexico, and the La Preciosa project, among others. These new projects are expected to increase silver production by about 18 million ounces per year. In addition, Russia's Prognoz silver mine will also start production this year.

In Peru, transportation and production of silver mines will be smoother due to reduced social unrest. Although the closure of some old mines and the decline in ore quality may suppress some production growth, overall silver mine production is still expected to rise.

Based on published mining plans and the development of new projects, we expect silver production to increase in 2024 compared to last year, with more significant growth in 2025.

1. As a by-product of mining other base metals such as gold, lead, zinc, and copper, the increase in output of these basic metals will boost silver supply:

HSBC wrote that although only about 30% of silver mine production comes from primary silver mines, the majority of silver production comes as by-products of gold and other base metal mining. In 2024, by-product silver production may slightly decrease or remain unchanged, but is expected to increase by 2025.

Firstly, high gold prices will support the growth of silver production, as many mined gold contains silver, and some gold mining activities have a high content of silver by-products.

Secondly, the situation regarding the production of base metals and their impact on silver supply is more complex. HSBC's base metals team predicts that production of base metals will increase this year and next, which may also promote silver supply. However, supply issues with specific metals may inhibit production. For example, the closure of the Cobre Panama mine will affect copper supply this year, significantly impacting silver production. Lead/zinc production in Peru will overall decrease this year, but the increased production of Hindustani Zinc in India will partially offset this decline In addition, the production cost is much lower than the silver price, incentivizing silver miners to increase production as much as possible. Currently, the production cost is around $17 per ounce, much lower than the prices of primary and by-product silver production, providing sufficient profit margins for producers to increase silver output when possible. While some facilities may be "retired," this will only limit rather than reverse the growth in silver production.

Therefore, HSBC pointed out that silver mine production performed better than expected in 2023, reaching 831 million ounces, and is expected to further increase to 843 million ounces in 2024, and is projected to increase to 864 million ounces in 2025.

3) Silver recycling volume is expected to reach a multi-year high:

HSBC believes that silver recycling is expected to reach a high point in nearly a decade this year, becoming the second largest source of silver supply after mining.

Currently, silver recycling is mainly divided into two types: one is the routine recycling required in the industry due to environmental regulations; the other is recycling decided by individual holders, such as jewelry, tableware, or silver bars. Industrial recycling follows the product lifecycle, and in recent years, environmental regulations have become increasingly stringent on recycling. Individual recycling is more selective, with people possibly increasing scrap silver supply when prices rise and decreasing it when prices fall.

Especially in India, jewelry recycling is very sensitive to prices. We expect that with silver prices staying above $25 per ounce, combined with the weakness of the Indian rupee, it will stimulate silver recycling activities in India.

According to data from the Silver Institute, silver recycling volume has increased from 177 million ounces in 2022 to 179 million ounces. We expect that this year, with silver prices remaining high, especially when prices approach or exceed $27 or even $30 per ounce, more scrap silver supply will be brought in for recycling. In 2024, silver recycling volume is expected to significantly increase to 192 million ounces, and in 2025, it will remain at 187 million ounces, as stable prices may suppress recycling activities next year.

Even if silver prices fall in the future, due to environmental regulations and the promotion of green awareness, silver recycling volume is unlikely to fall below the basic level. It is expected that with the increasing demand for photovoltaic products, the expanding use of silver in electronic products, and the advancement of silver and precious metal recycling technologies, the long-term outlook is that silver recycling volume will continue to increase.

From an investment sentiment perspective, the cooling of the Fed rate cut expectations and the strengthening of the US dollar will suppress the rise in silver prices

Firstly, silver prices are highly correlated with gold, copper, and other commodities, and their trends often affect silver prices. If the price of gold falls, silver prices may also decline, but this may be offset by the impact of historically high copper prices:

• Silver and gold are both considered precious metals and are often seen as safe-haven assets in the market. This means that when economic uncertainty increases or currencies depreciate, people may buy these metals to protect their wealth. Therefore, when the price of gold rises, silver prices usually follow suit.
• Copper is an important industrial metal, and its price often reflects the strength of global industrial demand. When copper prices reach historical highs, this usually indicates active global economic and industrial activities. Besides being a precious metal, silver is also widely used in various industrial applications such as electronic products and solar panels As a result, when the price of copper is high, it indicates strong industrial demand, which may also drive industrial demand for silver.
• If the price of gold falls, theoretically it should lead to a decrease in the price of silver. However, if the price of copper is high at the same time, the strong industrial demand reflected by this high copper price may support the price of silver, offsetting the negative impact of the gold price drop on silver.
• Therefore, HSBC concludes that if the price of gold falls, the price of silver may also decline, but this may be offset by the impact of historically high copper prices. For example, in a recent report on gold, analysts warned that the gold price may be too high and could fall. This situation may also affect the price of silver.

Secondly, HSBC predicts that the Federal Reserve and other central banks may not cut interest rates as quickly as previously expected, the US dollar will strengthen, which may also suppress the rise in silver prices. Because the price of silver is often negatively correlated with the US dollar, a strong US dollar means that investors may shift funds to seemingly more stable or higher-yielding US dollar assets, so a strong US dollar usually puts pressure on the price of silver.

Furthermore, especially when economic or political uncertainties increase, institutions and individual investors may increase their investments in silver to diversify risks, leading to a moderate recovery in silver ETF demand this year and next. Moreover, HSBC believes that the holdings of ETFs are unlikely to further decline, as they have been heavily sold off in the past two years, so exchange-traded funds (ETFs) may start accumulating silver.

Looking ahead, HSBC expects silver prices to moderately decline but still have strong support

Looking ahead, HSBC predicts that in 2024, silver prices will rise in sync with gold prices, but as gold prices fall, silver prices will also experience a slight pullback. Despite facing downward pressure, the support from strong industrial demand and supply-demand fundamentals will limit the downside space for prices, supporting silver prices to remain stable in 2025.

HSBC points out that according to our supply-demand model and the Silver Institute's survey data for 2024, there was a deficit of 136 million ounces in the silver market in 2023. The deficit in the silver market will increase in the future, and we expect the deficit to expand to 200 million ounces in 2024 and remain at the level of 197 million ounces in 2025. A moderate deficit helps explain our forecast of only a slight decrease in prices this year and price stability in 2025.

While this deficit will help prevent a sharp decline in silver prices, it is not enough to support a long-term bull market. In particular, if the silver price approaches or exceeds $30 per ounce, it may lead to further reduction in demand for silver coins and bars. If the silver price continues to drop to $22 per ounce or below, it may trigger greater demand.

Therefore, HSBC has moderately raised its average silver price forecast for 2024 from $24.33 per ounce to $25.38 per ounce, and expects the price range for silver this year to be between $22.00 and $30.00 per ounce. The average silver price forecasts for 2025, 2026, and the long term remain unchanged at $25.50, $26.20, and $24.00 per ounce respectively. The forecasted prices at the end of the year are $24.90 per ounce for the end of 2024 and $25.80 per ounce for the end of 2025 Silver supply and demand model, including total supply and total demand. This model considers 10 aspects in the market, including mineral and recycled supply, industrial demand, photography, jewelry, coins and bullion, as well as ETF (Exchange-Traded Fund) demand