How Do We Define Silver Demand?

It really doesn’t matter how many billions of ounces trade in the paper silver futures market. The only demand that matters comes from…

by Larry White of the Gold & Silver Education Center

If you are just now starting to look into precious metals and silver in particular, one of the first things you will want to know about is the demand for silver. As with anything, we all know that when the demand for any given item exceeds its available supply, it puts upward pressure on the price. But long time silver observers have been frustrated time and time again as it sometimes seems like silver is the biggest exception to this fundamental economic principle. The last few weeks are just another example. Reports come in from seemingly everywhere that demand for silver is through the roof. Dealers report difficulty maintaining inventory to sell. People on the Reddit Wall Street Silver forum daily report huge silver buying complete with photos and videos to document the purchases. All this and yet the silver price reported daily has not moved significantly higher after one short term pop up in February. What causes this phenomenon? I think the key is we have to properly define “silver demand”. This article will take a look at that idea.

First let’s examine the most recent supply and demand data available from The Silver Institute. Many people are familiar with these numbers and they give us starting point to talk about how we should define “silver demand”.  Here are the key numbers from 2020 we want to focus on for this discussion.

The chart linked above shows the data below for the following categories. 

  • Industrial       475 million ounces
  • Photography    30 million ounces
  • Jewelry          187 million ounces
  • silverware        54 million ounces

——————————————————-Total “Stable”  Demand   746 million ounces 
I am calling this total of 746 million ounces “stable demand”. If you look at the history of these categories, they stay very steady over time and represent an ongoing demand that is likely to stay at this same level or trend higher into the future. The industrial component is for sure likely to grow and at least offset any decline in the other categories. 
Next let’s look at the numbers for what we will call “investment demand”. This would include people investing in silver in a variety of ways that causes actual physical silver to be taken out of the marketplace as available supply. This could include coins, bars, silver rounds, and any actual physical silver acquired by ETF funds like PSLV and others. The Silver Institute reports that investment demand for 2020 was 336 million ounces, if you combine their Physical Investment and Net Investment in ETP’s numbers.
Now, how do we define this segment of silver demand? I believe this segment can be viewed as a more “volatile” kind of demand” . If you look at its history, we see much greater fluctuations over time ranging anywhere from 165 million to over 330 million ounces in any given year (2020 is the highest year of demand for this kind of demand listed on the chart). That is quite a bit of “swing demand”.
Now that we have the actual numbers, let’s see if we can try to better define “silver demand” in terms of real demand that can put upward pressure on the price of silver.
The first thing we must do is completely ignore all the paper futures silver contract trading that goes on all the time in the futures markets. There is an enormous amount attention paid to this activity because this market is so highly leveraged and determines the silver price most people see.  However, it is obvious if we follow the futures market that the “demand” for silver by those buying long futures contracts is not really demand for silver for the most part (it is mostly speculators betting on price). Only if the holders of those contracts take possession of physical silver would we define that as real demand for silver in this analysis. Most people trading in that market have no interest at all in taking possession of real silver so in our view here, they are not part of “silver demand”. It really doesn’t matter how many billions of ounces trade in that market. The only demand that matters comes from contracts that stand for actual delivery.
Next, let’s look at our volatile “Investment” category of demand. This is real demand and when it surges upward, it can put upward pressure on silver prices. However, this demand is a bit more complicated and nuanced. There are two important questions we have to ask about the people buying silver for investment:
1- At what price will you no longer buy any more silver because the price is too high?
2- At what price will you sell some or all of you silver because you think it’s the right time to sell?
Because the answers to these two questions are different for individual investors and also may be constantly changing all the time, it becomes very difficult to know how much of this category of silver demand we can count on at any given point in time. Probably the best we can do is look at the lower end of the range (165 million ounces) and perhaps assume that level of demand is likely to stay in place no matter where the price is trading. When prices get too low in the minds of people who want to buy, this category will surge higher. But what happens if prices do surge up towards the previous all time high for silver around $50? How will that impact this category of demand? Will a surge in price keep drawing in new buyers who don’t want to miss out? — or — Will a surge in price provide an opportunity for investors already holding a billion or more ounces of silver in various forms to take profits?  As you can see, anyone who tells you they know what will happen in the future with this category of demand has to be pretty talented to somehow know how all the people involved in the market would react to a price surge higher.
This is why the recent surge in new interest in silver by groups like Wall Street Silver (Reddit) creates a new unpredictable dynamic in the silver market. You can see from the numbers above roughly how much demand and supply is out there today. We know that investment demand when it surges can create a very tight market and put upward pressure on the price for physical silver (again, we are ignoring the futures price here because that can have little or nothing to do with the price people have to pay to get actual physical silver). 
So let’s just ask some questions instead of making predictions since so many predictions seem to fail.
– Will groups like Wall Street Silver continue to grow and add enough sustained demand for actual real silver to create a relentless sustained demand at increasing price points?
– If enough demand for actual real silver is created to start moving the price higher in a sustained way, at what price point will sellers start to outnumber new buyers?
– Has the mine supply of silver peaked and started into a long term decline? and  At what price can the existing known silver reserves be extracted from the ground at a profit? 
– Will the “Industrial” demand for actual physical silver continue to grow as expected? What impact will a move to green energy have on demand? Keep in mind that this demand has to be met and these buyers are likely to pay just about any price for silver.
– At some point, will the stable demand category above grow to the point that it begins to approach the new annual supply of mined silver creating a fight to get silver between silver investors and industrial users? Keep in mind, the USGS cut its most recent estimate of global silver reserves to a 17 year supply based on current annual demand. 

-What impact would there be on the silver market if just 1% of all the trillions of investment capital in the world moved to buy actual physical silver for any reason? How much stored above ground silver is there available to supply the years ahead if stable demand and investment demand combined consistently outpace annual mine supply going forward?
The point here is that in order to define “silver demand” in a way that will matter in terms of putting upward pressure on prices, you must think about these questions and come to your own personal conclusion as to the answers. There are clearly several factors impacting demand for real silver. The market is reasonably tight at this time. The total silver market is tiny compared to other world markets (see May 2020 chart). 
One million new younger silver investors in real silver globally would impact this market for sure. Five million would greatly impact this market. That is not all that many people required to make an impact. But those investors will have to be buying actual physical silver if we are going to define them as creating real “silver demand”. Speculating on the silver price with paper versions of silver is not creating any “silver demand” per our definition here. Time will tell us if enough real silver demand (as we are defining it here) shows up to put upward pressure on the price of silver.