Chinese Silver demand surges – Is this a calculated move?

Gold demand in China has been strong this year, reflecting a broader movement of the yellow metal from the West to the East. But the Chinese aren’t just accumulating gold. They have also been hoarding silver in recent months.

The Shanghai Metals Exchange has reported a significant surge in silver volume with prices consistently higher than Western exchanges. The price premium in China compared to the West has been as high as 10 percent. This signals an extremely strong demand for silver in China.

Chinese silver imports have also surged, hitting a three-year high of 390 tons last December. In June and July this year, imports broke through the 400-ton level. A year ago, import levels were half that, averaging in the 200-ton range.

According to the Jerusalem Post, “This suggests that China may be deliberately driving up the price of silver to drain the West's resources.

Last year, China held the second-largest silver reserves in the world, trailing only Peru. Chinese reserves were reported at 71,000 tons. Peru, a major silver producer had a silver stockpile of 98,000 tons. U.S. silver reserves were 23,000 tons, ranking seventh globally.

If the Chinese can push the silver price higher, it could have major implications for the West, the Post reported.

“If the price of silver continues to rise, it could increase production costs for a wide range of industries, from electronics to solar panels. This could lead to higher consumer prices and a further slowdown of economic growth as China out-produces the West in electronics and solar panels.”

Silver’s outstanding electrical conductivity and reflectivity make it a crucial input in the ever-growing tech and green energy sectors.

The rapid expansion of solar energy use is one of the key factors pushing silver demand higher. As the Silver Institute reported, "Higher than expected photovoltaic (PV) capacity additions and faster adoption of new-generation solar cells raised global electrical & electronics demand by a substantial 20 percent. At the same time, other green-related applications, including power grid construction and automotive electrification, also contributed to the gains."

However, there is some indication the growth in Chinese solar panel production could go beyond market-driven demand. According to a recent Bloomberg report, the Chinese are producing solar panels at an excessive clip. There is some speculation that the Chinese are engaging in some low-level economic warfare hoping to put the squeeze on Western economies.

According to the Post, the country has produced so many solar panels, some Chinese citizens are using them as garden fences.

China supplies about 80 percent of the world’s photovoltaic panels.

U.S. officials have voiced concern about Chinese trade practices in the solar sector, signaling they may be concerned that the policy goes beyond economic competition. In a memo released last May, the Biden administration said, “The U.S. Trade Representative, the Department of Energy and the Department of Commerce will closely monitor import patterns to ensure the U.S. market does not become oversaturated and will explore all available measures to take action against unfair practices.”

Growing industrial demand for silver globally could also put upward price pressure on the metal.

Industrial demand set a record of 654.4 million ounces in 2023 and is expected to hit new highs this year.

China isn’t the only Asian country with an increasing appetite for silver. Indian silver imports are set to double. Analysts cite increasing solar power production and demand from the electronics sector as the primary drivers.

Silver demand has outstripped production for three straight years and the Silver Institute projects another market deficit this year.

In 2023, the silver market charted a structural deficit of 184.3 million ounces. The projection is for an even larger supply shortfall this year in the neighborhood of 215 million ounces. This would be the second-largest silver market deficit ever recorded.

The Post report raises the specter of a silver squeeze.

“Analysts warn that the growing demand for silver, coupled with limited supply, could lead to a ‘silver squeeze’ similar to the silver squeeze of 1980. If investors begin to panic and rush to buy silver, the price could skyrocket, causing significant disruptions to the global economy.”

Silver seems to be underpriced for these market dynamics.

The gold-silver ratio is over 87:1, meaning that it takes 87 ounces of silver to buy an ounce of gold. To put that into perspective, the average in the modern era has been between 40:1 and 60:1.

In other words, from a historical perspective, silver is underpriced.

Historically, the ratio has always returned to the mean. And when it does, it does it with a vengeance. The ratio fell to 30:1 in 2011 and below 20:1 in 1979.