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Silver Dips on Worries of COVID-19 Impact on Industrial Demand

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Silver prices declined 3% to $17.97 on Feb 25, on reports that the coronavirus outbreak is taking the shape of a global pandemic. Notably, silver had been gaining so far this year until this setback on safe-haven demand spurred by the coronavirus outbreak in China and the U.S.-Iran conflict.

Coronavirus Spreads Beyond China

Per the World Health Organization’s report, as of Feb 25, 2020, there have been 77,780 confirmed cases of coronavirus in China.  In fact, 518 new cases have been reported in the past 24 hours, per the report. The current death toll in China is at 2,666. However, the outbreak is now not only confined to China but also across 33 other countries with 2,459 confirmed cases. Notably, 390 new cases were reported in a day with Afghanistan, Bahrain, Iraq and Oman reporting their first cases. The disease has claimed 34 lives so far outside China. Three countries in particular have been impacted severely — South Korea with 977 cases, Japan with 157 cases and Italy with 229 cases.

Stock Markets Take a Beating

This scenario has sent global stock markets tumbling. The Dow Jones Industrial Average fell 879.4 points to close at 27,081.36, marking a decline of 3.15%. This dismal performance comes on the back of a 1,032 point plunge the previous day. This marks the largest two-day percentage slide for the index since February 2018. The S&P 500 lost 97.68 points or 3.03% to close at 3,128.21. The Nasdaq Composite lost 2.77% to close at 8,965.61.

The latest spike in cases in South Korea and Italy primarily triggered the downslide. The uncertainty regarding the situation, primarily the scale and magnitude of its impact, is the chief reason behind the concern.

Silver Losing Sheen

Silver like gold is considered a safe haven asset in times of uncertainty. However, silver has gained 2% so far this year significantly underperforming gold, which has surged 8%. In fact, the yellow metal touched seven-year highs and is trending above $1,600 an ounce, fueled by apprehensions that the coronavirus outbreak is on the verge of becoming a global pandemic.

However, this development is working against silver. Silver’s unrivaled characteristics make it indispensable for many industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. Consequently, with the coronavirus spreading rapidly to other parts of the world, concerns regarding its impact on global economy and industrial activity is taking the sheen off silver.

The virus has already crippled the manufacturing sector in China. The country is a major buyer of goods from other countries. Silver is a vital metal in the production of solar cells that produce electricity. China is the largest photovoltaic (PV) silver market globally. The outbreak is expected to hurt car sales in China — the world's largest auto market. With over 36 million ounces of silver utilized annually in motor vehicles, it is bound to take a hit.

Most of the companies have updated their first-quarter outlook while releasing their fourth quarter numbers, thanks to the coronavirus outbreak. Factory closures in China, reduced demand for goods and services, and disruption in global supply chains are the primary reasons behind the updated views. With the industrial sector expected to take a major hit, it is weighing on silver as well.

The Mining - Silver industry rallied 21.5% over the past year, compared with the S&P 500’s growth of 14.6%. The industry falls under the broader Basic Material sector, which declined 11.6%. Stocks like Pan American Silver Corp. PAAS, Alexco Resource Corp. AXU and First Majestic Silver Corp. AG have been among the major movers over the past year, gaining 78%, 48% and 38%, respectively.

Future Prospects Look Bright

While the impact of the coronavirus outbreak remains an overhang currently, demand for silver will rebound once the situation stabilizes. Demand from the electrical and electronics sector should account for the bulk of gains. Silver use in the automotive industry is expected 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, aided by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a major catalyst. Jewelry demand is anticipated to grow led by India. In the United States, silver jewelry consumption should remain healthy, courtesy of stronger online sales.

Per the Silver Institute, silver mine production is anticipated to grow by 2% in 2020 — the first annual increase in five years. The silver market is expected to end this year with a surplus of roughly 15 million ounces.

Investors keen on the industry may consider stocks like Fresnillo PLC FNLPF and Great Panther Silver Limited GPL. Both of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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