The surprising reason that silver prices are on their way up

Carlos Barria/Reuters

Silver prices are up 49 percent already this year. But there are good reasons to think they could go even higher – and that they could stay high.

(More on silver, and how to make money investing in it, can be found by clicking here.)

Growing demand and falling supply

Mined silver is normally a byproduct of other mined commodities like lead-zinc, copper, gold, and copper-nickel. Global silver mine production averages around 671 million ounces per year.

Silver demand has exceeded supply for the past 10 years. This year should be no different – and may be higher than normal.

Commodities researcher CPM projects that silver output from mines will drop 2.4 percent in 2016. That’s the first time in over a decade that silver production will fall. Meanwhile, CPM forecasts “fabrication” demand – that is, what industrial companies will need to build solar panels, electronics, jewelry, as well as coins – will rise by 1.6 percent in 2016.

Unlike gold, silver is an important metal for industrial use. More than half of mined silver is used for industrial purposes: solar panels, electronics, photography, water purification, and more.

Its industrial usage is what contributes to a constant demand for silver.

Carlos Barria/Reuters

A growing source of silver’s industrial demand will come from solar panels.

About 70 million ounces of silver are expected to be used by solar panels in 2016 – about 10 percent of total production. That’s 23 percent more than last year. Silver demand for solar panels will continue to grow. The U.S. Energy Information Administration notes solar energy is the fastest growing energy source… growing at 8.3 percent per year. And solar capacity is expected to grow more than 20 times by 2040 from 2010 levels.

Solar energy could grow faster with technological advances. Especially since most of the world is committed to reducing carbon emissions – from coal, oil, and gas.

And the primary way to harness solar energy is through solar panels… which need silver. About 90 percent of crystalline silicon photovoltaic cells (which capture the energy) in solar panels use silver paste.

Solar energy should continue to be a major tailwind for silver. This will keep demand high – and support silver prices.

Like renowned investor Jim Rogers said when explaining how to figure out commodity prices, “Is there too much or too little?” And right now there’s too little silver.

Silver is decoupling from the U.S. dollar

Silver’s historical correlation to the U.S. dollar is -0.42 (based on five-year, monthly data). When assets have a negative correlation, it means their prices tend to move in opposite directions. (Correlation is how two assets move in relation to each other. You can learn more about it here.)

The reason for this is that silver – like nearly all commodities – is priced in U.S. dollars. So when the value of the U.S. dollar increases, it can buy more ounces of silver. When the value of the dollar decreases, it takes more dollars to buy an ounce of silver. Below, you can see their inverse correlation over the past five years. That means when the dollar goes up in value, silver falls. And vice versa.

Carlos Barria/Reuters

After September 2011, the U.S. dollar (black line) gained about 20 percent. Silver prices (red line) nearly halved.

But recently, silver prices have started to boom… despite a strong dollar. This year, silver prices are up 49 percent. And they rose 17 percent in the month of June alone.

The U.S. dollar has remained roughly flat. But silver has been roaring higher.

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