Silver Market Faces Supply Deficit Amid Geopolitical Tensions

A report by Motilal Oswal highlights rising silver demand and supply constraints driven by geopolitical tensions. Silver is expected to gain demand by 2% in 2024, with supply lagging behind, potentially driving prices higher. Geopolitical events and U.S. economic indicators add to market volatility.

In a recent report by Motilal Oswal Financial Services Ltd, the impact of geopolitical tensions on precious metals, particularly silver, has come into sharp focus. The Silver Institute's forecast indicates that silver demand is expected to grow by about 2 per cent from 2023 to 2024, reaching around 1,219 tonnes.

Industrial demand is projected to hit a record high of 710.9 tonnes, driven by an 8.5 per cent increase compared to 2023 and a remarkable 40 per cent rise since the pandemic. Meanwhile, demand for jewellery and silverware is expected to increase by 4.5 per cent, although net physical and photographic demand is anticipated to decline.

On the supply side, total silver supply is expected to decrease by about 1 per cent, aligning with levels observed in 2021. Mine production is projected to fall to 823.5 tonnes, attributed to ongoing operational challenges that hinder output. The high prices in domestic markets have made recycling less attractive, further constraining supply. As a result, demand for silver is anticipated to outstrip supply for the fourth consecutive year, creating a persistent market deficit that could drive prices upward.

In 2024, silver has shown a remarkable recovery, gaining approximately 30 per cent year-to-date. Despite fluctuations due to the ambiguous nature of Federal Reserve interest rate policies, the metal is well-positioned in the gold-silver race. Recent data indicates a 70 per cent probability of a rate cut in the upcoming September Fed meeting, which could support precious metals.

Investor sentiment remains cautious due to ongoing geopolitical events and weak economic indicators from the U.S., further supporting silver prices. Domestic imports have surged by approximately 4,000 tonnes, while modest exchange-traded fund (ETF) flows and speculative buying are providing additional price support.

The report highlights how ongoing conflicts and economic uncertainty, notably since the Russian invasion of Ukraine in 2022, have increased risk premiums in financial markets, making safe haven assets more appealing to investors. The report outlines that geopolitical conflicts--from the trade tensions in 2019 to the recent flare-up between Israel and Hamas--continue to exert pressure on market stability.

With the United States entering an election year, the potential for economic unpredictability could further enhance silver's appeal as a safe haven asset. As attempts for a ceasefire in the Middle East intensify, ongoing military actions in Gaza add to the uncertainty. Moreover, tensions between China and Taiwan remain a concern, contributing to a volatile investment environment.

Manav Modi, Senior Analyst of Commodity Research at Motilal Oswal, said, 'Life time high prices at domestic front seem unfavourable in terms of recycling which indicates that the incentives for recycling are not strong enough to significantly increase supply. Demand for silver is projected to exceed its supply for the fourth consecutive year in 2024.' He added, 'This suggests that the market balance for silver will remain in deficit, contributing to potentially higher prices as demand outpaces supply. Overall, these factors indicate a challenging supply situation for silver in 2024, with production constraints from mining and ongoing deficits in market balance driving the market dynamics.'

The U.S. Federal Reserve has maintained a steady interest rate environment, having raised rates significantly over the past year. As inflationary concerns ease, market participants are now adjusting their expectations for rate cuts, which have shifted dramatically from earlier predictions of three to four cuts in 2024 to just one.

According to the CME FedWatch Tool, the market is currently pricing in a 70 per cent chance of a rate cut in the September meeting, which could provide further upward momentum for precious metals like silver. (ANI)

(With inputs from agencies.)