Silver futures for September delivery closed at $18.637 an ounce on Jun 30, up 3.17% in a day. The white metal has notched a gain of 31% in the second quarter — a dramatic comeback from a decline of 21% in the first quarter. Given that industrial applications account for 60% of the global silver consumption, the slowdown in industrial activity amid the COVID-19 pandemic severely impacted demand. The turnaround can be attributed to optimism over financial stimulus and pickup in industrial activity as economies are gradually opening or easing restrictions.
Industrial Demand to Buoy Silver
Per the Institute for Supply Management, the U.S. Manufacturing Purchasing Managers’ Index (PMI) came in at 52.6% in June after a reading of 43.1% in May. After remaining below 50 (which indicates contraction) for three consecutive months due to the damage inflicted by COVID-19 pandemic, the PMI has finally crossed the 50 mark. The PMI also recorded its largest increase since August 1980, when it increased 10.5 percentage points. Considering the fact that the manufacturing sector accounts for 11% of the U.S. economy, this raises hopes regarding an economic recovery.
Meanwhile in China, the official NBS Manufacturing PMI was 50.9 in June 2020 — the fourth straight month of increase in factory activity. This is a major recovery from the all-time low PMI reading of 35.7 in February which was due to the coronavirus-induced lockdown. 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 silver demand.
Eurozone Manufacturing PMI came in at 46.9 in June, above the expectation of 44.5 and previous month’s 39.4. This was the weakest contraction in factory activity in four months, owing to easing of coronavirus-induced lockdown restrictions.
Silver Miners Resume Operations
Mexico, which is the world’s largest silver producer, churns out nearly 23% of world production of the white metal. About 80% of Mexico’s mining sector has been restarted, and the country continues to ease restrictions on miners. Peru, which trails Mexico in silver production, is also allowing miners to resume production.
The concerns over riots in the United States, trade spat between the United States and China, and the coronavirus pandemic will continue to fuel the safe-haven demand for gold and silver. Global efforts to restart and revive economies following the coronavirus pandemic-induced lockdowns are anticipated to sustain silver demand.
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 80.2%, outperforming the S&P 500’s growth of 24.7%. The industry falls under the broader Basic Material sector, which slid 10.2%.
The industry currently carries a Zacks Industry Rank #164, which places it at the bottom 35% 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 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.
Backed by long-term prospects of silver, 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 166.7%. 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 Avino Silver ASM, Hecla Mining Company HL and Great Panther Silver Limited GPL, which have projected year-over-year earnings growth of 217%, 92% and 53% for the current fiscal, respectively. The estimates have also undergone positive revision in the past 30 days.
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