Silver prices have been bearing the brunt of slowdown in industrial activity in the first few months of this year on account of the coronavirus-induced crisis. In fact, silver had plunged to 10-year low of $12.12 in March. However, silver prices have regained ground — trending above $17 an ounce since mid-May and closing at $17.50 an ounce on Jun 17. This turnaround has been triggered by expectations of an economic recovery that is expected to revive demand for the white metal given its many industrial applications.
Economic Recovery to Drive Silver
Reopening of stores following the coronavirus-induced restrictions, U.S retail sales — the primary gauge of consumer spending — jumped 17.7% in May, recovering from a record decline of 14.7% in April. It also trumped the expectations of an 8% rise. Further, the United States added 2.5 million jobs in May and the unemployment rate fell to 13.3%. It was a major turnaround from April, when it had lost a record 20.7 million jobs and unemployment rate was at 14.7%. Revival in these numbers instill optimism in the fact that the economy is gradually recovering from the massive damage inflicted by the efforts to curb the spread of the virus.
Further, initial trial results from the U.K. showed Dexamethasone — a steroid used to reduce inflammation in other diseases — has been successful in reducing the mortality rate among the severely ill COVID-19 patients. This major breakthrough also helped lift market sentiment.
In the United States, industrial production increased 1.4% in May, as most factories started resuming operations partially following pandemic-related suspension. Industrial production had suffered its worst drop of 11.2% in April. Manufacturing output rose 3.8% in May after a record slump of 13.7% in April. Considering the fact that the manufacturing sector accounts for 11% of the U.S. economy, a pick up in the sector raises optimism regarding the overall economic recovery.
Meanwhile in China, the Official NBS Manufacturing PMI was 50.6 in May 2020 — the third straight month of increase in factory activity as companies resume operations. This indicates a major recovery from the all-time low PMI reading of 35.7 in February amid the coronavirus-induced lockdown. This indicates that China is gradually moving out of the crisis and is working toward full normalization of economic activities.
Silver plays a vital role in the production of solar cells that produce electricity. China is the largest photovoltaic (PV) silver market globally. The country is also the world’s largest auto market. With more than 36 million ounces of silver utilized annually in motor vehicles, a pick-up in manufacturing activity will translate to demand for the metal.
However, news of a second wave of infections has raised concern. Nevertheless, this uncertainty will work in favor of silver given that it is also considered a safe-haven asset in times of uncertainty.
Global silver mine production is anticipated to decline 4.6% in 2020 primarily owing to disruption of operations and mine closures on account of the pandemic in the beginning of the year. Global efforts to restart and revive economies following the coronavirus pandemic-induced lockdowns are anticipated to boost silver demand. This, in turn, will drive the white metal’s prices. The Silver Institute expects silver prices to attain the $19 level by the end of this year.
Demand from the electrical and electronics sector should account for the bulk of gains. Silver utilization in the automotive industry is likely to register impressive growth aided by vehicles’ rising sophistication and electrification. Silver use in 5G-infrastructure and upcoming intelligent electronics is also likely to fuel demand. The ongoing revolution in green technologies, driven by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a key catalyst.
Industry Performance & Rank
In the past three months, the Mining – Silver industry has rallied 62.4%, outperforming the S&P 500’s growth of 29.1%. The industry falls under the broader Basic Material sector, which gained 47.4%.
The industry currently carries a Zacks Industry Rank #92, which places it at the top 36% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Investors keen on the industry may consider Alexco Resource Corp AXU, which currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for fiscal 2020 earnings for Alexco Resource, which is based in Vancouver, indicates a year-over-year improvement of 167%. The estimates have also been revised upward from an expectation of a loss of 5 cents to earnings of 4 cents per share in the past 60 days.
Investors might consider keeping an eye on Zacks Ranked #3 (Hold) stocks like First Majestic Silver Corp. AG, Avino Silver ASM and Endeavour Silver Corporation EXK that have earnings growth expectation of 183%, 217% and 82%, respectively, for the current year. The earnings estimates for these companies have also undergone positive revisions lately.
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