AGQ - Silver May Surge To $100 Thanks To AI

2023-11-27 07:31:35 ET

Summary

• Silver prices could reach triple-digit valuations if the Fed eases its monetary policies.
• The green energy transition and artificial intelligence technologies are increasing the demand for silver.
• The risk factors for silver include higher interest rates, a stock market selloff, and market speculations.

Silver could become a popular metal if the Fed decides to ease its monetary policies. But it is also essential not just for "green" energy transition but also for AI technologies. In 2011 the grey shiny metal used to trade for as high as $50 per ounce. I will explain that can make the silver prices reach triple-digit valuations.

Recap of my previous article on silver

In my earlier article on silver , I wrote about the possibility of silver hitting $100 per ounce. Among the reasons were the levels of money mass in the US economy, the overbought stock market, and the precious metal's undervaluation. Whilst all these factors have remained unchanged, there are other reasons why silver could be worth much more than it currently is. And that is not just a " green " energy transition. AI technologies also require heavy usage of silver. I understand there are some sound reasons why the grey shiny metal might not hit all-time highs. But with artificial intelligence, the upside risks have increased.

Fed's next moves

The US reported very low CPI readings for October . These decreased to almost two-year lows.

This is the most important macroeconomic indicator to watch nowadays if you are trying to guess what the Fed will do next. Although unemployment numbers, retail sales, and the overall health of the US economy matter, the Fed has been paying the most attention to inflation. A target of 2% has been mentioned many times in the Fed's press conferences. So, if the inflation rate falls down even further, the Fed would likely be forced to stop hiking and even start easing. Add to that the fact the unemployment market is seeing signs of a slowdown. For the month of October, the US unemployment rate hit a 21-month-high. It increased to 3.9% in October 2023, slightly exceeding analysts' expectations and the previous month's reading of 3.8%.

There is a possibility of a soft landing if there is no major "black swan" event and the Fed reacts appropriately to these statistics.

Silver price history

Gold and silver prices grow the most when the monetary conditions are easing. For example, in 2011 when the Fed's fund rates were really low, silver prices were at the highest totaling almost $50 per ounce.

The only exception was the 1970s - 1980s period when the interest rates were at their all-time highs. The commodity prices, however, traded so high mostly because of inflation but most importantly due to the Hunts' speculations . At the time the brothers Hunt cornered the silver market and stockpiled large reserves of physical silver.

As a general rule, the lower the interest rates, the higher the silver prices.

The diagram above shows silver prices adjusted for inflation. In 1980 the inflation-adjusted silver price per ounce was as high as $140, whilst in 2011 it was close to $70 per ounce. The point I am making is that the current price of around $23 per ounce is not the absolute maximum silver can reach. Please note that right now the Fed is quite hawkish, whilst silver prices are not trading at their all-time lows. Imagine what would happen if the Fed eases. But the dovish Fed is not the only factor that matters here.

Green energy and artificial intelligence

Apart from monetary easing, the green energy transition and artificial intelligence could be excellent demand stimuli for silver. After all, tech and industrial applications account for more than half of global silver demand.

For example, according to scientists at the University of New South Wales, solar manufacturers will likely need more than 20% of the current yearly silver supply by 2027. By 2050, solar panel production will consume almost 85-98% of the current global silver reserves.

However, artificial intelligence will require vast supplies of precious metals. According to Metals Focus, there will be a higher demand for chips powering AI technology. But in order to produce chips, precious metals are required. The demand for these stayed somewhat low due to the fact there was low global economic activity. For example, the demand for gold in the technology and industrial sector was down 3% year-on-year in the third quarter.

Due to the evolution of AI, however, this trend could change in the coming year, not just for gold, but also for silver. According to Metals Focus, shipping growth for artificial intelligence servers and switches will increase by double digits over the next several years to stay in line with the evolution of AI algorithms. Demand is also expected to increase for silver-palladium Ag-Pd multi-layer ceramic capacitors (MLCCs) in high-power components.

Interestingly, artificial intelligence demand for precious metals will most significantly affect the silver market. That is because the grey shiny metal has the lowest electrical resistance among all metals at standard temperatures. Moreover, it is an essential component in many electronic applications. The metal is already in short supply due to rising demand in the green energy sector. So, silver demand will likely run hot over the next several decades.

Risk factors

The risk factors are the following:

• The interest rates could stay higher for longer. Not only the Fed, but other central bankers may possibly prioritize fighting inflation for a longer time period.
• A stock market selloff resulting from a recession may make the commodity prices fall for a short time period. But this will be very temporary, in my view.
• The industrial demand for silver may not be as high as initially expected. But this is not very likely because there are plenty of silver uses, from solar batteries to AI technologies.
• The most significant risk, in my view, is that of market speculations. For example, some J.P. Morgan traders got convicted of precious metals spoofing. Similarly, the general market may simply ignore silver, whilst buying something else instead. For example, stocks are very popular right now. But I personally believe that " this too shall pass ". In other words, the bullish factors cannot be ignored forever.

Conclusion

Monetary easing and high industrial demand are very bullish factors for silver. Although the timing is quite uncertain here, there is still potential for silver to surge to triple digits. The fundamental factors are all there. Moreover, in the past, silver used to trade very high. The possible downside risks are a potential recession ahead, as well as any speculators who might hold the prices down.

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