The Demand For Silver In Solar Industry Has Been Dwindling
· Free Press Journal
Earlier this month, along with gold, the prices for silver, platinum and palladium rose sharply. The silver price has risen by more than 10 per cent to its highest level since late June. As a result, the gold/silver ratio fell below 70 again.
While the platinum price increased by 9.5 per cent to $1,790/oz, the price of palladium rose by more than 10 per cent over the same period to nearly $1,400/oz. These are the highest price levels since mid-June and late May, respectively.
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Silver Demand From Solar Sector
Opinion is now gathering ground that the tailwind for the silver price from the solar industry could be slowing down. 19 per cent less silver would be used in the production of solar modules this year than last year, some estimates suggest. This would mark the second consecutive year of decline.
The solar industry’s share of total silver demand is projected to fall to 14 per cent, down from 18 per cent last year. This assessment largely aligns with that of the Silver Institute in April, which also anticipates a significant decline in demand from the photovoltaic sector this year.
Analysts attribute this to a reduction in the use of silver in silicon solar cells. This segment is expected to witness a fall by a further 17 per cent this year. One likely trigger could be the sharp rise in silver prices that reached a record high of $120/oz at the end of January. User industries are looking for cheaper substitutes that are equally effective.
Although the silver price has fallen by roughly half since the end of January, it is still around 65 per cent higher than a year ago. Silver currently accounts for more than 17 per cent of the production costs of a solar module, making it the largest component of material costs.
Gold Gains On Safe-Haven Demand
Interestingly, the gold market reacted clearly positively to the possible opening of the Strait of Hormuz. For the first time since mid-June, the price of a troy ounce climbed back close to $4,300. On August 14, the yellow metal was trading around $4,343/oz, up 7 per cent from a month ago.
Many analysts are fundamentally optimistic for the yellow precious metal because they consider expectations of US interest rate hikes to be somewhat exaggerated. The timing could prove to be too early if further difficulties arise in the Persian Gulf peace negotiation process.
At first glance, the sharp increase in the gold price coincides with hopes of an imminent (renewed) opening of the Strait of Hormuz. However, the magnitude of the price move is surprising. Up till now, the argument has been that an end to the US-Iran conflict would primarily reduce inflation risks and, in turn, reduce the need for central banks—primarily led by the US Federal Reserve—to raise interest rates. That, in turn, is positive for gold.
Yet, US interest rate expectations have hardly changed in recent days or have only declined marginally. This development is reminiscent of last year, when the gold price rose far more than the fall in US rate expectations would have justified. As was the case last year, currently the demand for gold is supported by additional factors.
Scepticism Over US Safe Havens
One obvious development is renewed scepticism regarding the status of the US dollar and US Treasuries as safe havens. This has been fuelled, on the one hand, by the last Fed meeting at which the new chair, Kevin Warsh, did not, in the market’s view, adopt a sufficiently clear stance in favour of rate hikes.
On the other hand, the Fed’s historic intervention in the JPY (Japanese yen) market has also unsettled investors. The reason cited for the Fed’s involvement in supporting the yen is concern about excessive selling of US Treasuries (to generate USD liquidity for interventions).
In other words, the US Treasury fears (further) increases in bond yields. Against this backdrop, gold is in demand above all because it is not exposed to default risk and would, therefore, not be affected by a sovereign debt crisis.
It must, however, be emphasised that investor demand is usually fickle. Speculative funds will flow into investments that provide the highest returns. Again, too much bet is placed on central bank purchases. Data of the last four years clearly suggest such purchases are on a declining trend.
G. Chandrashekhar is an economist, senior editor and policy commentator specialising in commodity markets. Views are personal.