Outlook 2021: Supply/demand fundamentals for precious metals

The supply and demand fundamentals for precious metals markets got thrown into disarray this year, leading to heightened volatility – first on the downside, then on the upside.

Although gold and silver will finish 2020 below their highs for the year, gold is still headed for an annual return of close to 25%; silver around 45%.

Can hard assets investors look forward to further price appreciation in 2021?

Yes, but…there are some near-term risks to the favorable long-term supply/demand outlook.

Assuming economic conditions begin normalizing next year, we would expect demand – especially from industrial users – to increase. Mine production would likely rebound as well.

The mining industry, like many others, faced unprecedented operational challenges in 2020 due to COVID disruptions. Many mines around the world were forced to scale back or suspend production in the first half of the year.

By the third quarter, mining output among major producers began to ramp back up. Overall, though, the top 20 gold miners will finish 2020 with an estimated 5% drop in output.

The mining industry is issuing optimistic guidance for 2021. Whether it fully recovers to pre-COVID numbers remains to be seen.

While mine supply is likely to increase versus 2020, so is consumer demand for refined precious metals products such as jewelry. Investment demand for bullion will, as usual, be a wild card that could move the market at the margins.

A related wild card is the coronavirus. Epidemiologists hope something close to herd immunity can be reached via mass vaccinations. But the virus remains unpredictable and could mutate into multiple new strains.

Virus risks, political risks, and inflation risks emanating from the Federal Reserve’s unrestrained printing press are all potential catalysts for safe-haven investment buying of precious metals.

Silver Made a Historic Low in 2020… Will It Make a New Record in 2021?

A massive surge of investment demand hit the bullion market this spring as panic gripped Wall Street and bargain hunters came out in droves.

What occurred was a once-in-a-generation event. Some markets reached unprecedented extremes that defied centuries of recorded history.

For example, crude oil futures traded deeply into negative territory for a day. And silver got historically oversold versus gold, as the gold silver ratio spiked to as high as a never before seen 130:1.

Near the absolute bottom of the market on March 17th, we wrote, “Never has silver been as cheap to acquire in real terms as it is today. Never has the silver market traded so wildly disconnected from its fundamentals.”

That article suggested we had hit “peak fear” – out of which “a new uptrend in silver, and a corresponding narrowing of the gold:silver ratio, can be expected to extend for years.”

The very next day, March 18th, silver hit its absolute low point for the year at $11.75/oz. It went on to spike up to nearly $30/oz in August.

A less dramatic 2021 may be in store. Even so, a global economic recovery and return to some semblance of normalcy would help stimulate demand for industrial metals as well as silver, platinum, and palladium.

A major trend set to accelerate in the months ahead is the move away from fossil fuels and toward electrification.

Solar power and battery technologies are experiencing explosive growth, and with that growth comes a need for lots more copper, nickel, silver, and strategic metals. In fact, solar panels are one of the fastest growing sources of silver demand.

The “green” programs of the incoming Biden administration, coupled with ongoing fiscal and monetary stimulus being into the economy, could have the unintended consequence of stimulating metals markets.

Demand can grow much more rapidly than supply. Some analysts expect to see widening supply deficits for silver and platinum in 2021.

According to Bloomberg Intelligence commodity strategist Mike McGlone, silver will head toward a new record high on improving fundamentals and gathering technical strength.

Silver investors should expect some volatility and perhaps some surprises on the way to an eventual new high in dollar terms above $50/oz. It may happen next year. It may take a bit longer.

Having a long-term horizon is crucial to being able to participate in the full magnitude of a precious metals bull market.

A new nominal high in silver will just be the first major milestone in a bull market that could go up many multiples from here before being expensive or overvalued in real terms.