Buying silver paid off handsomely last year, when investors turned to the precious metal as a haven while the global economy floundered. Now, the bet on silver rests on its importance to solar power.
That could make it a better bet.
Silver more than doubled in price between March and August, 2020, rising to an eight-year high of more than US$29 an ounce.
Now, though, precious metals are trailing other commodities, and silver is partly to blame. Enthusiasm for silver producers has also faded: The Global X Silver Miners Exchange Traded Fund (SIL in New York) fell about 25 per cent from August through March. But the ETF recovered some ground in April and rallied more than 4 per cent on Thursday – suggesting that interest is again stirring.
If silver loses some of its appeal as the economy heals and its reputation as a safe asset during tumultuous times becomes less relevant, its importance to solar panels should endure – especially as the world turns its attention to reducing carbon emissions.
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According to the International Energy Agency, renewable power will account for 95 per cent of the net increase in global power capacity through 2025. The IEA expects that solar will account for 60 per cent of all additional renewable capacity.
Silver’s role here? It is an essential component in photovoltaic cells, and demand has been rising with the number of solar installations.
According to the Silver Institute, an industry group led by mining executives, photovoltaic cells drive 9.5 per cent of total demand for the metal today, up from 6.5 per cent a decade ago (silver is also used in jewellery and other industrial applications).
If that sounds particularly bullish, keep in mind that the amount of silver used in each solar cell has been declining because of innovation. Cells made in 2019 used about 80 per cent less silver than cells made in 2009.
But that’s not a deal breaker, according to analysts at CIBC World Markets. In a report this week, Cosmos Chiu, Alex Hunchak, Erin Kyle and Shaz Merwat noted the silver content per cell is unlikely to fall much more, while overall demand surges.
“We expect additional demand from the increasing number of solar cells constructed will more than offset the more limited impact from future silver thrifting,” the CIBC analysts wrote.
Their numbers, drawn from BloombergNEF, a research provider focused on the low-carbon economy, suggest that global solar gigawatt capacity will double by 2025 and triple by 2030.
As a result, the analysts expect that annual silver demand in photovoltaic applications will rise by 35 million ounces by 2025, to 135 million ounces a year. In 2021 and 2022, they expect rising demand will be greater than the growth in silver production.
This deficit should bolster prices over the next couple of years. The CIBC analysts expect silver will trade at US$29 an ounce this year, rising to US$31 in 2022.
Their enthusiasm is shared by others: Goldman Sachs expects silver will trade at US$30 an ounce this year and next, and possibly as high as US$33 if China turns more aggressive toward renewable energy.
That means the shares of silver producers are worth a look. Here’s two of the biggest:
Pan American Silver Corp. (PAAS in Toronto) produced a lacklustre 17.3 million ounces of silver in 2020, owing to COVID-19 restrictions at mines. But the company expects production will rise to at least 22.5 million ounces this year. Canaccord Genuity analyst Dalton Baretto noted in February that the debt-free company should generate enough free cash to pay a special dividend this year.
Wheaton Precious Metals Corp. (WPM in Toronto) is a streaming company that has paid upfront for precious metals production at 23 mines. It produced 22.9 million ounces of silver in 2020, exceeding its forecast.
The share price has been recovering from recent lows in March, and rallied again Thursday. But the price is still down about 25 per cent since July, implying there could be more upside ahead.
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