Silver Price Will Depend on ‘Severity of the Shortage.’ Here’s What It Means — Bart Melek

hey everyone I'm Jeremy saff you're watching kco news don't forget to subscribe to our channel for the latest on today's show we're zeroing in on Silver the metal has had a tremendous run up around 133% year to dat and more than 20% in the last three months at one point almost hitting the $30 Mark currently sitting down around 3% since Friday now silver is a medal with its fingerprints all over today's economy from solar panels to electric vehicles as Industries ramp up demand in central bank's tweak monetary policies we're examining how these forces are shaping silver markets trajectory joining us to break down these trains is Bart mik uh managing director and Global head of commodity strategy at TD Securities Bart welcome back to the show thanks for being with us today oh thank you for inviting me great to be back yeah of course uh let's talk metal let's talk Precious Metals first we'll start of course with silver uh we've seen some dramatic swings and silver prices recently with a notable drop last Friday I'm wondering before we dive into this explain the main factors that are driving these uh volatile changes and these Swings with silver uh you know I I think most recently it it's probably the idea that the Federal Reserve may not be as quick to draw on lowering rates as we saw it you know even a short while ago uh there was a growing narrative out there that uh the next fed move could even be a hike you know certainly we don't believe that uh at this point despite of the fact that us data is H quite strong particularly on the employment side inflation is quite elevated uh but we don't think the FED is going to want to get any more restrictive uh do they want to keep rates um uh you know at current levels probably so what does that mean ultimately it means that the cost of carry uh will be a lot higher uh we've already had you know you know quite considerable amount of position changes that that got us there we got ctas commodity trading associ associate you know algorithmic funds falling Trends and capitalizing on this um but for now I I think we should maybe expect a little bit drift lower some of those gains to be given back as we are pondering of what the FED is going to do and of course what the FED does will very much um Drive of what demand for silver up the core is uh we're also getting some angst surrounding China policy uh right now and that could uh weaken Chinese exports uh certainly to to the United States North America broadly so uh you know I'm not at all surprised that silver moved up close to 30 you know to around 30 bucks and then moved lower but beyond the cyclical impact looking you know the longer term I think silver is in a great position to be significantly higher where it is because it has a structural deficit uh problem now I want to talk a little bit about these deficits before we do you know I guess supply and demand really is the factor here but these are some interesting movements I mean is there something unusual happening to these markets of course we're waiting for pce on Friday we got some more economic data but silver and gold have been uh you know somewhat very interesting this year well they couple right uh gold uh has done extremely well at a time when the Federal Reserve has been on uh you know uh you know a four decade uh more more most aggressive uh tightening cycle in four decades or so uh and gold has done very well uh part of the reason that it has is because physical demand from investors particularly in Asia and to some extent Europe and Central B Banks bought a record amount in 2020 to they bought close to records last year and contined to see China you know for the 17th month in a row in March acquiring gold into its reserves we're seeing a full Fred diversification away from uh the dollar and Fiat currencies broadly among the central banks uh so gold has done very well despite of the fact that we had policy that was quite tight despite of the fact that ET TF investors were really not particularly interested and we've seen you know for the first time recently uh home offices and I think there are probably central banks a while back buying uh as well and other physical investors that made gold a better bet uh than silver I think that will in the long run change a silver becomes less of a metal dependent on the interest rate and Lease rate in environment the financial markets and there are very good reasons for that okay let's talk about some of these reasons before we do I mean obviously we'll go back to H well no we'll talk about gold in a minute I want to go back to Silver because we all know what an important role that metal is for renewable energy you know Electronics solar panels we talked about a little bit of them I'm curious you know these technological advancements are they going to impact Silver's demand here but also with the supply let's talk a little bit about this mix absolutely look I I think going forward and we're not talking next six months because there's going to be a lot of cyclicality and a lot of movements but when you go for the longterm two three years we we've got several years of pretty significant deficits and you know def deficits defined as what is recycled and mined versus what is consumed in in in real markets so what what we've been doing is we've been drawing on inventor and there is maybe you know 300 million ounces left uh that's unallocated that can move back and forth you know in swap markets I'm on Buon Banks and Etc but if you have let's say 100 million ounce plus deficits over the next two years well that inventory that buffer is going to disappear and you know economists or strategist like me you know forly trained in how price mechanisms work will say well then you going to be in an auction price environment where the silver price is no longer on the margin set by what the marginal cost of production and developing facilities are or recycling it it's going to be set based on your so-called marginal revenue product or the revenue do deriv from that incremental ounce of silver to produce let's say a $100,000 vehicle increasingly as time moves on we're going to have upwards two ounces of silver in these EV battery driven Vehicles they have a lot more Electronics a lot more smart devices in them and all of them to some degree use silver and the loading is going to be much greater well and then you're going to get into an environment where the people who can make the most money out of using an incremental ounce or two ounces of silver are going to bid it up uh you're not going to stop producing a 100,000 $200,000 vehicle or or you know even a $50,000 vehicle for a matter of $80 let's say worth of silver you'll bid it up and you will need to incentivize inventory holders maybe bullan holders and others who might have invested in that metal to give it up or somebody with a less productive use to give it up well we don't really know where that price will be it will depend on the severity of the shortage and what your opportunity cost in prod giving up that unit of of silver is in terms of what you lose in profitability and you know and and that's quite undetermined and for the most part quite interesting so you can have spikes much above the marginal cost of production on the mining side and and and that's quite key on the supply side well you know what vast majority of silver is from zinc lead production copper production and gold production right and we're not seeing an awful lot of investment on that side so almost by definition if you're building less zinc mines you know or the increas is low you're not going to get a lot of new silver either uh Prime primary silver maybe there's a different case to be made for it but we're not seeing huge amounts of Investments when we project forward the amount of silver you will need to get let's say to Paris Accord targets you know to the cafe standards in the United States uh you know in the next eight years it's going to be well over 50 you know miles to the gallon uh you're going to have to produce a significant portion of your Fleet you know 60% if not more um in pure EVS to achieve those goals well that's going to mean silver uh we're going to be banking under the you know the IRA the inest inflation reduction act uh we've got what 340 billion allocated for The Greening of the US economy of course Canada other European countries are doing the same thing right well that means solar panels to some extent it means new grids well you know what silver is used for all thats the the new technology for silver uses a lot more loadings um than the old technology so if we're ramping up the generation of power um and want to make it green yeah silver is going to play a role uh the timing exact timing is is is going to be you know it's always difficult you know with government policy in particular there's cyclicality interest rates but I'm pretty sure five five years down the road silver will probably be higher than it is now and you know you often hear people talk about there's going to be a persistent deficit of silver yeah well you know what it can't happen it's a physical commodity you know at least in my reality you can't use silver that doesn't exist to put in electronic components or or solar panels talk to me about this sbart we we had a guest on fairly recently and they were talking about the idea that the supply and demand curve is so diminished that if you were to go and physically get for some exchanges anyway to go and physically get your silver out there's a possibility that they can't even give it to you and they'll have to pay cash are we here with the supply and the demand uh you know I I I I I'm not so sure uh you know and that's an area that I I don't really want to make a comment on because I I haven't done a comprehensive study uh all that but look you know you can settle in physical you can settle in in in in in cash um and there's a lot more going on in this market than exchanges there is a you know entire massive OTC market that I think uh you know uh people don't talk much about or as much as they could be there's a whole London bullion market and so on um and there are large Holdings there are Holdings above ground in the form of silver or and others and that is all potential Supply the question is how elastic is that Supply in that sense what's the price point right you know at what level do I take you know my deceased Grandma's silver and melt it yeah and you could could take a while and you know and there is the thrifting so at some point I will use less silver and look at technological solutions to uh Thrift it out of my produ C system uh it doesn't you know happen overnight but it does happen um over a period and and we know technology moves on and there are responses to higher prices we've recently seen that with platinum and Palladium where we've had these catalst being redesigned uh to have a larger representation or loading of platinum versus Palladium because of the price differentials that were uh present so we can redesign we can Thrift um we can incentivize people to give above ground inventory and you know over the long run we can invest in primary capacity as well um so these markets are Dynamic um and you know in our view the long-term price is consistent with the marginal cost of production but that's the long run uh okay in the in the medium run um you know if demand spikes and the supply chain isn't available well you you're gonna have to convince somebody to stop using it and they're going to you know offer it up to you or make it so expensive so as I said you're functioning in this uh you know this seems very F line almost a teeter totter you know yeah yeah you know absolutely and and there's the interest rate envirment where where if I get a yield I can lend you my silver against you know future production so there are a lot of things going on it's just not really about primary supply and demand we've seen as you know well you don't have to look far back uh where we had a record level of deficits and price silver price went down right yeah you know that seems inconsistent with Supply man Theory but it really is because it's Supply by other than primary needs uh and inventory play a lot my point is that over time those inventories will get drawn and the supply demand fundamentals will be more indicative or how prices move okay let's talk about the investment appetite here then because obviously while silver often follows gold we talked a little bit about that Divergent but its industrial uses give it such a unique position in the market are investors seeing this when they're viewing silver in comparison to gold and you know what what would a significant Divergence between the two medals mean for investors oh I I think Industries definitely see it and you know and ultimately um I would truly expect over time as the as there is more certainty about where the economy is going over the next uh year or two uh where government funds remember in the United States we have an election coming up where some of these environmental uh initiatives uh may be at risk you know I have no idea who's going to win I guess we'll see when we see in fact I just wrote a paper and that published a few hours ago on on that very thing um so there's still a lot of uncertainty but once that uncertainty goes regard the economy future policy and the largest market uh you know economy in in in the world um I think you know and we start being more sure when the FED actually starts cutting I think investors are going to materialize and they're going to materialize in size interesting okay uh you know we're watching closely for Friday's numbers on the pce we got lots of data coming out from the FED as you just explained especially for potential changes this year the market currently pricing in two we'll see what happens I'm curious give us a little bit of a delay of the land if we hear some of these data you know if we go from three to two cuts what's this going to do for silver what's it going to do for gold in the coming months or what's the opposite going to do if they start easy well look uh with in Broad Strokes higher inflation higher than you know materially higher than expected ultimately means that the FED remains you know on the restrictive side weaker economy or weaker inflation means they're more likely to cut uh so far the economy has surprised in the United States at least significantly to the upset you know after the most restrictive stance in monetary policy in some 40 years or so today were you know not today but last employment print was 300,000 plus jobs wag is growing at four and a half when we look at the CPI we're we're still far far away from the 2% Target so the FED is unlikely to do anything for for for now um a move from two unexpected you know two cuts to three I don't think it makes much of a difference 25 basis points you know won't won't really move the needle much but you know we move from you know not not long ago talking about six from 62 uh that could be material particularly at uh uh some of the physical buying moderates I still expect silver to outperform gold because it has a lot of catching up to do and the fundamentals looked looked pretty decent going into 2025 um but if the FED were to move to let's say no Cuts this year or you know talk start talking about Heights if inflation doesn't budge in the economy State uh that that be negative and it really doesn't matter what the you know primary Supply demand numbers look I think uh you you would get the flow movements uh from investors and that's because of carry right uh you got to think of it this way if I'm holding an ounce of silver or any other zero yielding asset you know very much like a zero coupon Bond well what happens when that interest rate goes up well the valuation goes down right so we we think of uh zero yielding Commodities and for most investors there are zero yielding if you're holding physical uh they behave very much like a zeroc coupon bond with a lot more convexity because you know they kind of last forever right okay let's talk a little bit about uh you know those are changes in the fed's policies we've obviously seen Iran and um and Israel kind of calm some tensions we're really not sure as to what's happening uh you know as to the latest we're going to be keeping an eye on it but I'm curious the geopolitical side of things we saw that selloff last week for Gold for silver it seemed to be um because of that if we see escalation or even deescalation here should we be watching for yeah you know typically speaking um a significant increase in geopolitical Risk T to be good for gold and and usually is okay for silver though silver being 60% industrial it's not so clearcut you can have uh an expectation that the demand side on the industrial in the industrial areas will offset some of the investor side so it's not a faar cut but look ultimately geopolitical risk is good the problem with geopolitical risk is it doesn't result in let's say you know eliminating flows of oil in some areas or has lasting effects people tend to learn to live with risk and tolerate it and if there is no monetary policy or fiscal policy response that's long dated there is a bit of a reversion to the mean you know we kind of look at it and go okay that was very nice but nothing really happened and you know there might be some risk premium but a lot of the initial risk premium uh will will be sold off now well said and we'll be keeping an eye on uh obviously pce on Friday uh but I couldn't talked to you all day my friend we didn't even really get to the other Commodities but we're out of time of course Bart Malik managing director and Global head of commodity strategy at TD secur is joining us today Bart always a pleasure to have you on I appreciate your time today well thank you so much and have a great day we'll talk to you soon I'm Jeremy saffron for K Cod news thank thank you for watching today please don't forget to subscribe like that video even send us a comment I'll be sure to watch out for them we look forward to seeing you next time [Music]

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Keywords: gold, silver, finance, news, investing, investing news, finance news, financial news, economy, precious metals, gold price, silver price, gold price today, silver price forecast, gold price forecast, kitco news, silver market trends, Bart Melek, Jeremy Szafron, Kitco News, commodity strategy, silver prices, industrial demand silver, monetary policy impact, gold vs silver, economic indicators, future silver prices, investing in silver, gold prices, commodities, TD bank gold

Id: LZz2uusOyW4

Length: 21min 57sec (1317 seconds)

Published: Tue Apr 23 2024