Silver Price May Touch $30 Per Ounce In 2023

Analysts argue that 2023 will see shortages of silver and predict the price per ounce will total $30 per ounce. The last time the spot prices reached that level was in 2013, almost 10 years ago. But how bold or how conservative is this prediction? We will see in this article.

US default?

One of the interesting recent news was the US debt ceiling and the discussions in the Congress on how to change it. The problem is that the US debt has been rising for a while. Right now, it is lingering near the 125% of the annual GDP. This is a record high. In order to solve the problem, there are proposals to cut the government spending. Another problem solution could also be introducing a rule that would instead limit debt to a share of national economic output. Some analysts predict the US could default on its debt. But the latter is a highly unlikely outcome. I do not think the US would be willing to cut the spending either. This is quite an unpopular measure. So, in my view, the lifting of the debt ceiling is a very probable outcome since this has been happening in the past.

This is true if we take both the US public debt history in USDs and the US debt as a percentage of the GDP.

You can see from the graphs above, that the US debt has been rising for ages. So, it is likely the debt ceiling will be lifted again.

This decision, however, would further contribute to the USD’s devaluation because debt is paid back due to money-printing by the Fed. The latter, obviously, decreases the value of the USD. This is very bullish for precious metals, including silver.

But I am not bullish on silver just because of that. There is a substantial shortage of the grey shiny metal.

Silver shortage

According to Nicky Shiels, head of metals strategy at MKS PAMP, silver is in a short supply because there is a substantial decrease in the physical inventories held in New York and London’s physical hubs.

In Shiels’ opinion, there will be deficits of more than 100 million ounces over the next five years, with industrial demand leading to the tight supply.

The largest segment of silver demand is industrial. It makes almost 50% of total demand. According to Nicky Shiels’ bullish case, one ounce of silver should reach the price of $30 or more.

Randy Smallwood, president of Wheaton Precious Metals, said that industrial demand will grow by more than 15% over the next five years. Particularly high will be demand from the automotive and electronics sectors.

Just a quick reminder that silver is a metal primarily used in the making of cars, solar panels, jewelry and electronics.

Silver and the interest rates

Although silver is a commodity dependent on the interest rates, it has been quite stable in the last months, although the interest rates have been going up for a while. The higher the interest rates, the lower are the silver prices. But silver is still holding up pretty well. Some analysts argue that silver prices should fall if there is a recession.

But it might not happen. Inflation is bullish for both silver and gold. It is often argued that when there is a recession, there is no inflation. It is often but not always the case. Stagflation (recession + inflation) also happens. The most obvious example is that of the 1970s in the US. But imagine the Fed would have to lower the interest rates if the unemployment rate goes through the roof, whilst GDP will fall substantially. At the same time, the inflation rate would stay quite high. Although Powell confirmed his respect of the 2% inflation target, he might still have to lower the interest rates and even start the quantitative easing program, thus devaluing the dollar. In order to hedge their savings from devaluation, many investors and speculators might go for silver as a more accessible and volatile commodity than gold. If silver is still quite expensive now when the interest rates are high, why cannot it go even higher when the interest rates fall? In fact, it is likely to happen.

Risks

One of the biggest risks is that of a recession, which will obviously lead to a fall in demand for industrial metals. This is substantial since 50% of the demand is due to industrial uses. But a recession will provoke endless money-printing from the side of the Fed, which will be bullish for silver prices.

At the same time, there could be a “safe landing”, which means the Fed would end up avoiding a recession. But if they want to achieve that, there is obviously a need to gradually ease the monetary conditions, which will also be bullish for silver.

The only major risk I see as valid is that of silver market manipulations. Some major investors, including large financial institutions could artificially hold the silver prices down.

Valuation

Right now, the silver valuations are very moderate.

For example, inflation-adjusted silver prices are about average or even below.

Historical inflation-adjusted silver chart

Source: Macrotrends

The Dow-to-Silver ratio is also low, in spite of the fact that Dow has been correcting for 1 year.

Dow-to-Silver ratio

Source: Macrotrends

In fact, the levels observed now can only be compared to the Dot.com bubble in the beginning of the 2000s. Soon after the bubble burst, this ratio decreased and the grey shiny metal appreciated. A similar thing can actually happen now.

Conclusion

Whilst there highly likely will not be any US default, the USD will most probably keep losing value since the Fed will highly likely start printing more money again. This is bullish for silver. But there are real shortages of physical silver, which is an industrial metal. Add to that the fact this commodity is undervalued. So, it is highly likely the silver prices will rise this year. But I, personally, think that price-guessing is a silly game to play and no one can say for sure how much one ounce of silver will be this year.