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Silver Loses Sheen as Coronavirus Impacts Industrial Demand

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Silver prices have slumped 30% so far this year, closing at $12.64 an ounce on Mar 17. This decline can primarily be attributed to the rapidly spreading coronavirus pandemic, which has disrupted global economic activity consequently weakening consumption of industrial raw materials. The situation has only been aggravated by the fact that silver is already in oversupply.

Per the World Health Organization’s report, as of Mar 17, 2020, the global coronavirus cases stood at 179,112 with the death toll at 7,426. The number of cases in China is at 81,116. New cases are being reported from countries across the globe every day. Notably, Italy is the worst affected country after China with 27,980 cases.

Stocks have taken a beating due to the growing uncertainty surrounding the scenario, primarily the scale and magnitude of its impact on the global economy. The Dow Jones Industrial Average has declined 25.58% so far this year. The S&P 500 and Nasdaq Composite lost 21.7% and 18.25%, respectively, so far this year.

Silver’s Industrial Demand Takes a Hit

Silver like gold is considered a safe-haven asset in times of uncertainty. However, silver has fallen this year significantly underperforming gold. In fact, the yellow metal soared above $1,700 an ounce for the first time in seven years fueled by the coronavirus pandemic.

However, the current situation is working against silver. The metal’s unrivaled characteristics make it indispensable for many industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption.

The virus has already crippled the manufacturing sector in China. The country’s industrial production plunged 13.5% year over year in January-February 2020 — the first drop in industrial output since 1990. 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 anticipated 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.

The impact of the outbreak on customer spending, containment measures, travel restrictions, factory closures, disruption in global supply chains, among others, are expected to weigh on the global economy. Per the Organisation for Economic Cooperation and Development (“OECD”), the coronavirus outbreak could cut global economic growth in half and push several countries into recession. The body projects meager growth of 2.4% in the world economy this year — the lowest rate since 2009. Growth prospects for China have been revised downward to below 5% this year after 6.1% in 2019. With the industrial sector expected to take a major hit, it is weighing on silver as well.

The Mining - Silver industry declined 30.5% over the past year, while the S&P 500 fell 16.5%. The industry falls under the broader Basic Material sector, which declined 39.6%.

The industry currently carries a Zacks Industry Rank #230, which places it at the bottom 9% 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 gloomy prospects in 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has moved down 32%.

Demand Will Pick Up Eventually

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 expected to grow led by India. In the United States, silver jewelry consumption should remain healthy, courtesy of stronger online sales.

Investors keen on the industry may consider Pan American Silver Corp. (PAAS - Free Report) , which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

This Vancouver, Canada-based company has an estimated long-term earnings growth rate of 4%. The Zacks Consensus Estimate for 2020 earnings indicates growth of 5% from the prior year. The estimate has moved up 12% over the past 30 days. The company has a trailing four-quarter earnings surprise of 103%, on average.

Investors may consider keeping an eye on stocks like Fresnillo PLC (FNLPF - Free Report) , Fortuna Silver Mines Inc. (FSM - Free Report) and Hecla Mining Company (HL - Free Report) . All these companies carry a Zacks Rank #3 (Hold) at present and have positive earnings estimates for 2020.

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