Silver is enjoying a bullish run this year, rallying 10% on the back of an unstable stock market, global economic slowdown, and a weaker U.S. dollar. Last year, the metal which is considered a monetary asset as well as an important industrial metal, had tanked 12%.
 
The abysmal performance of the stock market has forced investors to flock to safe-haven metals such as gold and silver. U.S. gross domestic product expanded at a meager 0.7% in the fourth quarter of 2015. Weaker consumer spending, falling exports and a smaller build-up in business inventories led to the slowdown. The economy expanded at 2.4% in 2015, flat with 2014. The U.S. jobs market is starting to falter with the U.S. economy adding only 151,000 jobs in January, way down from the December number of 262,000 jobs.
 
Meanwhile, China’s manufacturing PMI (Purchasing Managers Index) has skidded to 49.4 in January, the weakest level seen since Aug 2012. This adds to the gloom of the world’s second-largest economy.
 
Given the state of affairs, there’s widespread concern whether the Federal Reserve will be able to hike interest rates as per its earlier plans. This uncertainty has led to the surge in silver prices. Apart from this, let’s have a look at what else is in store for the metal, particularly the basic supply and demand fundamentals that drive prices.
 
Demand Poised for Growth
 
The International Monetary Fund’s (IMF) latest World Economic Outlook projects growth at 3.4% for the global economy this year. Demand for silver will improve in tandem given its myriad applications. Industrial demand for silver is set to command a bigger proportion of total demand in 2016 from the 54% last year. Silver’s use in photovoltaics for solar energy is projected to rise, spurred by high single-digit growth in global solar panel installations and may account for more than 13% of total industrial demand in 2016.
 
The demand for silver from ethylene oxide producers is expected to jump more than 25% year over year to over 10 million ounces this year, with the major portion of demand coming from new plants and expansions at existing plants located in China. Demand in jewelry fabrication is expected to increase by 5% in 2016, an improvement from the modest contraction last year. Coin demand will be robust once again in 2016, following a record year. Increased interest in safe-haven assets will drive physical silver investment demand.
 
India will emerge as a major consumer driven by increased investor interest and growth in jewelry, decorative items and silverware fabrication.  Following a decline in scrap flows, India imported a record high 228 million ounces of silver bullion in 2015 to meet its annual fabrication requirements. The momentum is expected to continue unimpeded.
 
Supply Will Trickle Down
 
Global mine supply production is projected to fall 5% in 2016 – the first drop in global silver mine production since 2002. So far, the weak price environment provided little incentive for producers to invest in expanding capacity at existing operations. Thus, a dearth of new mines and drop in output from existing mines are expected to take a toll on supply. Moreover, silver scrap supply, which has been on the decline for several years, should further weaken in 2016.