Silver has had a roller coaster ride so far this year. The white metal’s prices had dropped to 11-year lows to $11.68 an ounce in March as the COVID-19 pandemic induced lockdowns impacted industrial demand. Production had also been impacted as mines had to shut down. However, silver has bounced back with a bang and rode past $29 per ounce in August — levels last seen in 2013. Silver futures for December delivery closed at $27.10 an ounce on Sep 17. In fact, silver has yielded a gain of 51% year to date, outshining gold’s rally of 26.6%.
Market uncertainty resulting from the COVID-19 pandemic and the long-standing U.S-China tensions have renewed interest in silver as an investment vehicle. Low interest rates, continued liquidity boosts by central banks and recovery in industrial demand is working in its favor.
Demand for Silver Picking Up
Industrial applications account for 60% of the global silver consumption. To stem the spread of the pandemic, the governments imposed restrictions, which led to a lull in industrial activity. This was reflected in the data provided by the Institute for Supply Management. The U.S Manufacturing Purchasing Managers’ Index (PMI) came in below 50 (which indicates contraction) from March to May. As businesses gradually resumed operations, the PMI crossed the 50 mark in June and has remained above 50 for three straight months now. In fact, the PMI was 56% in August — the highest so far in 2020.
Meanwhile in China, the Official NBS Manufacturing PMI was 51.0 in August 2020 — maintaining the streak of six consecutive months of increase in factory activity. This is a major recovery from the all-time low PMI reading of 35.7 in February dragged down by the coronavirus crisis-induced lockdown. China is gradually moving out of the crisis and working toward full normalization of economic activities.
The Eurozone Manufacturing PMI came in at 51.7 in August after July’s 51.8, owing to the easing of the pandemic-induced lockdown restrictions. Manufacturing output growth was reported for a second successive month in August and attained its highest level for over two years.
The pick in industrial activities will require more silver. Apart from this, the white metal’s safe-haven appeal also remains strong. Tensions between the United States and China, and the coronavirus pandemic have been spurring safe-haven demand for gold and silver. The uncertainty regarding the upcoming U.S. election will also continue to support demand.
Silver Production-Supply Imbalance is Imminent
Mines at Mexico and Peru, two of the world’s top silver producing countries, had to curtail or stop production as per the government mandates in the earlier part of the year. Even though these countries have allowed the mining sector to resume operations, resurgence of coronavirus cases might result in the closure of mines again, putting supply at risk. The Silver Institute now predicts the global silver mine production to dip 7% in 2020 due to the shutdowns earlier this year.
Global efforts to restart and revive economies following the coronavirus pandemic-induced lockdowns are anticipated to sustain silver demand this year. Demand from the electrical and electronics sector will account for the bulk of gains. Silver utilization in the automotive industry is likely to register stellar growth, aided by vehicles’ rising sophistication and electrification. Silver use in 5G-infrastructure and upcoming intelligent electronics is also likely to fuel demand. The ongoing revolution in green technologies, driven by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a key catalyst. While demand remains strong, the shortage in supply will drive silver prices this year.
So far this year, the Mining – Silver industry has gained 23.5%, outperforming the S&P 500’s growth of 4.2%. The industry falls under the broader Basic Materials sector, which gained 5.1%.
The industry currently carries a Zacks Industry Rank #105, which places it at the top 42% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Investors keen on the industry may consider stocks like Hecla Mining Company HL. The stock carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Hecla Mining’s fiscal 2020 earnings indicates year-over-year improvement of 246%. The estimates have been revised upward by 36% over the past 30 days.
Investors may also keep an eye on First Majestic Silver Corp. AG, Endeavour Silver Corporation EXK and Great Panther Silver Limited GPL, all of which carry a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for First Majestic Silver, Endeavour Silver Corporation (EXK) and Great Panther Silver Limited’s current fiscal year’s earnings suggests year-over-year growth of 50%, 89% and 76%, respectively. The estimates have also moved north over the past 30 days.
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