Silver: Arguments For and Against Further Price Growth

The Rapid Surge in Silver Prices

After a long period of stagnation, when many investors were hesitant to buy silver even at $30 per ounce, it has recently seen dynamic growth. In just a few months, the price surpassed the $40 mark and then surged higher, crossing the $50 and $55 thresholds and approaching the $60 per ounce level.

This dynamic has come as a surprise to many market participants. Just a few months ago, reaching the $40 mark was seen as the potential start of a long-term trend, but the speed of this growth has exceeded forecasts.

This surge raises a natural question for investors, especially those who entered the asset at lower prices: is it time to take profits, or is the potential for further growth not yet exhausted? There is no single answer, as the price is influenced by many conflicting factors.

Factors Favoring Continued Growth

There are several strong arguments that could support a further increase in silver prices. These factors can be divided into long-term structural and short-term market factors.

Key arguments in favor of growth:

1. Industrial demand. Silver is an indispensable industrial metal. It is actively used in the production of photovoltaic cells for solar panels, as well as in automotive electronics. Given the global energy transition and the boom in electric vehicles, demand in these sectors is set to grow.

1. Market deficit. Silver consumption already exceeds its mining output. Previously, this deficit was covered by scrap recycling and sales from investment funds. Now, investment demand itself is absorbing the physical metal, which only exacerbates the shortage.

1. Monetary policy. Markets are driven by expectations of monetary policy easing, particularly a reduction in interest rates by the U.S. Federal Reserve. Such moves traditionally support precious metal prices.

1. Negative real interest rates. Even if nominal rates remain high, against the backdrop of inflation, real interest rates (nominal rate minus inflation) are bound to be negative. This makes holding money in currency unprofitable and increases the appeal of assets like gold and silver.

1. Market and technical factors. In a rising market, many participants, including algorithmic funds and retail investors, tend to follow the trend by buying the asset, which creates additional momentum for growth. This phenomenon is known as the 'bandwagon effect'.

1. Catch-up dynamic. Historically, silver follows the trend of gold. After gold significantly increased in price, silver began to 'catch up,' narrowing the price gap.

Risks and Arguments Against Growth

Despite the positive factors, there are also serious risks that could lead to a sharp decline in silver prices. Investors need to consider these arguments as well to avoid unnecessary losses.

Key risks for the price of silver:

1. Global recession. This is the main risk. An economic downturn would lead to a decrease in industrial production and, consequently, a drop in demand for silver from manufacturers of electronics, electric vehicles, and solar panels. Lower demand will inevitably lead to a price decrease.

1. Strengthening of the U.S. dollar. Since silver is traded in dollars on global markets, a strengthening of the American currency makes it more expensive for buyers from other countries. This can reduce demand and put pressure on the price.

1. Sales from investment funds. If prices start to fall, the reverse 'bandwagon effect' could occur. Investors and large funds might begin to sell off their holdings en masse, creating excess supply in the market and accelerating a price collapse.

1. Technological substitution. There is a non-trivial risk that in some industries, silver could be replaced by cheaper metals, such as copper or aluminum. Although this is difficult to do in key areas like solar energy without a loss of efficiency, technological progress does not stand still.

1. Increased mining output. Theoretically, supply can be increased by developing new mines. However, this is a very lengthy process, taking 5-7 years. Additionally, silver is often a byproduct of mining other ores, which complicates a rapid increase in its production.

Conclusions and Outlook

The current rise in silver prices is the result of a combination of short-term market sentiment and long-term fundamental factors. Structural trends such as the supply deficit and the energy transition cannot be reversed quickly, which provides a basis for long-term optimism.

Nevertheless, investors considering entering this asset now, after its significant rise, should be prepared for high volatility. Market corrections can be very painful and severe.

Before investing, it is important to assess your psychological resilience. If you are prepared for the value of your asset to drop by a third at any moment without causing you to panic, then you have the right mindset for such investments. Otherwise, it might be wise to refrain from buying at current levels.