Silver bounces from 2022 lows: what to expect next?

One of the most interesting markets in the first months of 2022 was the commodity market. In times when inflation rises to decades-high levels, commodities failed to fulfill their role as a hedge against rising prices.

Not only that gold or silver did not make new highs in 2022, but they delivered negative returns in the first five months of the year. Take silver – it dropped like a rock on the back of a strong dollar policy in the United States.

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Yet, the case for silver remains strong for at least the following reasons:

• Silver supply dived into deficit in 2021
• Global silver mine reserves dropped in 2021
• Silver industrial demand tops pre-COVID highs
• A surge in EVs adoption
• Direct correlation with the S&P 500 index

Silver supply entered into deficit in 2021

Silver is a commodity. Therefore, its price depends on the imbalances between supply and demand.

Supply entered into deficit in 2021 as liver mining rebounded but to a lesser extent than forecasted. In addition, global silver mine reserves dropped in 2021 too.

Silver industrial demand is strong and rising

While supply declines, industrial demand for silver is strong and rising. Green technologies support demand for silver, as the metal is part of solar panel production as well as a key component of electric vehicles (EVs).

Demand is so strong that it topped the pre-COVID highs. After Russia invaded Ukraine in February, Europe is in a hurry to reduce its dependency on Russian fossil fuels.

Therefore, the race to green energy means ongoing investments, and silver is a critical component to account for.

Silver and the US stock market are correlated in 2022

2022 brought a correction in the stock market. The S&P 500 declined close to entering a bear market (i.e., a drop of more than -20% from the highs), before rallying by more than 6% last week.

The stock market rally is an important point to consider when looking at the price of silver. The two markets are correlated this year, suggesting that further strength in the S&P500 should be bullish for the price of silver.

History tells us that big weekly gains in the stock market, such as the ones from last week, are almost always followed by more strength in the next quarters. As such, silver may have already bottomed.