Silver prices have just experienced the strongest correction phase in many years, but global asset and investment management company Sprott Inc. believes that the long-term outlook for this precious metal is still very positive thanks to prolonged supply shortages, strong industrial demand and an increasing role as a value-depositing asset.
In the latest report on the precious metals market, Mr. Paul Wong - Sprott's operating partner and market strategist - said that silver prices in June recorded the sharpest drop since September 2011. In the second quarter, silver prices lost 16.57 USD/ounce, equivalent to 22.04%, marking the sharpest quarterly decline since the first quarter of 2020 in a period when the global market was affected by the COVID-19 pandemic.
According to Mr. Wong, this sell-off took place at the same time as gold prices plummeted, mainly due to expectations that the US Federal Reserve (Fed) will continue to maintain a tough monetary policy stance, pulling the USD up and putting pressure on precious metals. However, he believes that short-term fluctuations do not change the fundamental factors that support silver prices.
Sprott believes that the silver market has fallen into a structural supply shortage for many consecutive years. Supply not keeping up with demand has caused inventory to continuously decrease, while the number of new mining projects large enough to create significant changes to global supply is still very limited. According to the organization's forecast, the shortage may have lasted for about 7-8 years and is likely to continue for another 7-8 years.
In terms of demand, Sprott believes that silver is benefiting from a series of long-term growth trends. This metal is increasingly playing an important role in the production of solar panels, electrification systems, electric vehicles, artificial intelligence (AI) infrastructure, data centers and many other high-tech applications. In addition, demand from the defense sector is also increasing thanks to the superior conductor properties of silver.
Mr. Wong said that the previous strong price increase of silver was also affected by large speculative positions in the options market. When these positions were settled, silver prices fell more sharply than usual. However, according to him, the options market has now gradually returned to a balanced state, thereby reducing the risk of excessive volatility in the near future.
Not only industrial demand, the role of silver as an investment asset is also improving. According to Sprott, in the context of increasing economic and monetary instability, silver is increasingly seen as an additional option for gold in preserving value. Despite having greater volatility than gold, silver can still benefit from similar supporting factors for precious metals.
The report also shows that the physical silver market continues to be in a tight state. Low inventory and high delivery pressure maintained reflect that actual demand still exceeds existing supply. At the same time, the trend of physical silver flow shifting to Asian markets is said to increase the role of the physical trading market compared to transactions on the paper market.
According to Mr. Wong, silver has higher volatility than gold due to smaller market size and lower liquidity. Therefore, strong corrections are a common feature in silver price increase cycles and do not mean that fundamentals have weakened. In the past, many of silver's strongest periods of increase appeared after large fluctuations that made investor sentiment pessimistic.
Sprott believes that the long-term outlook for silver is still strengthened by the combination of prolonged supply shortages, continued industrial demand, the increasing role of silver as a currency asset and scarcity in the physical market. These factors will continue to create a supporting foundation for silver prices for many years to come.
