SINGAPORE (BLOOMBERG) - Inside a six-storey-high warehouse near Singapore's Changi Airport, a vast hangar-like space is waiting to be filled with a precious metal that usually plays second fiddle to its more lustrous sibling.
The vault that is being built by Silver Bullion will - when completed in the first half of next year - be able to store about 15,000 tonnes of silver. It is holding only around 400 tonnes of the metal at the moment, but the vacant space is an indication that silver appears to be on the cusp of a promising few years.
Demand for coins and bars is booming, fuelled in part by a Reddit-induced buying frenzy in February that drove prices to an eight-year high. While the fervour has abated, retail interest is still elevated, valuations are relatively cheap and measures are being taken to meet the surge in demand. The amount of silver stored in vaults in London rose 11 per cent in March to a record, according to the London Bullion Market Association.
As well as the Singapore vault, JM Bullion, one of the biggest precious metals retailers in the United States, plans to open a 25,000 sq ft warehouse in Dallas in June that will be used for storing silver and other precious metals.
The metal's crucial role in the energy transition - it is a key component in solar panels - also looks set to buoy consumption over the longer term. All this has analysts excited about silver's potential, with some seeing it outperforming gold this year.
"The outlook for demand growth for silver over the next few years looks very positive, especially across a wide range of industrial applications, including solar, 5G and automotive," said Mr Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights. "That, coupled with ongoing high levels of investment, is likely to create the need for more dedicated storage space for silver in bullion and also intermediate forms."
Silver Bullion founder Gregor Gregersen said he started searching for a bigger warehouse two or three years ago and that decision was vindicated last year when demand for the metal surged during the coronavirus pandemic.
"The idea is to make this into a really iconic building," he said during a tour of the vault that will be known as The Reserve. "There isn't really a facility built specifically to store large quantities of silver securely."
Singapore has a reputation as a stable financial centre and has taken steps to position itself as a bullion hub, exempting investment-grade gold, silver and platinum from a goods and services tax.
Physical investment in silver, which covers bullion coin and bar purchases, is expected to reach a six-year high of about 7,286 tonnes in 2021, according to the Silver Institute.
Spot silver, currently trading around US$25 an ounce (S$33 for 28g), is forecast by Citigroup to peak at US$28 to US$30 in the second half, aided by "still solid" investment demand and an end to physical de-stocking in China and India. Morgan Stanley sees the metal averaging US$25 an ounce in 2021, up 22 per cent from last year.
Gold, meanwhile, is stabilising after its first quarterly loss since 2018 amid high bond yields and optimism over the global economic recovery from the pandemic that is damping demand for the metal. Citi sees gold, currently fetching around US$1,700 an ounce, falling to US$1,575 in six to 12 months.
Sill, there is no shortage of silver. The Silver Institute expects the global market to remain in a surplus this year, although it has seen the lowest excess since 2015. And even against a backdrop of strong electronics and automotive demand, as well as growing solar power investment, silver's failure to break higher suggests the gold price, real yields and the US dollar remain powerful drags, Morgan Stanley said in a note.
"Considering the high correlation of silver to gold, and our bearish outlook for the yellow metal over the next 12 months, we expect silver together with gold to continue to struggle amid higher real interest rate expectations in the US," said UBS Group strategist Giovanni Staunovo.
JM Bullion chief executive Michael Wittmeyer is more optimistic. The Reddit-fuelled buying frenzy caused a spike in demand from existing silver bugs as well as brought in a lot of first-time investors in the metal. "We're just trying to expand our capacity so that next time this happens, we'll be able to get all these orders shipped more quickly," he said.
The accelerating move away from fossil fuels should also provide an enduring tailwind for silver demand as investment in solar power ramps up. China, Japan and South Korea all set carbon zero targets last year, while the US is considering emissions cuts of 50 per cent or more from 2005 levels by 2030.
The energy transition demand should give prices an extra boost, said CPM Group analyst Rohit Savant. Silver will average US$27 this year and beat gold due to its relatively cheaper valuation and strong investment demand, he said.
In Singapore, Silver Bullion's Mr Gregersen is confident all that currently vacant space in his vault will not go to waste. "Silver is usually a forgotten metal that people don't really care much about," he said. "But it's starting to shine a bit more and that trend will continue."