Why silver is having a golden moment

The commodity’s price is up about 34% year to date, outpacing gold, which keeps hitting record highs. Year to date, about $856 million has flowed into the iShares Silver Trust, an exchange-traded fund that owns physical silver bullion, according to FactSet. Wheaton Precious Metals, a company that owns the rights to precious metals from mines, including gold and silver, is up about 30% year to date.

Demand for silver has been strong, both as a store of value and as an industrial commodity. The Silver Institute, an industry association, estimates that demand for silver has been outrunning supply for the past three years. It projects another deficit this year. Citi Research, which assumes that solar-sector demand has been even higher, calculates that the market has been in deficit for the past five years.

For one, mine production has been weak. More than 70% of mined silver is a byproduct of other metals, such as lead, zinc, copper and gold. Prices for zinc have been weak, prompting mine closures. Last year, a major mine in Mexico—the world’s top supplier—didn’t operate for four months because of a strike. While recycling can make up for some of that shortfall, it typically accounts for less than 20% of total supply.

At the same time, demand from industrial uses has been growing, in large part thanks to solar-panel manufacturing, where silver is integral. Unlike gold, a major chunk of silver supply is used for industrial purposes. Solar-sector demand for silver jumped 158% from 2019 to 2023, according to the Silver Institute. The group expects that demand to grow an additional 20% this year.

“The electrification of the world is really providing a boon to silver," said Michael DiRienzo, chief executive of the Silver Institute. Most industrial uses of silver don’t have viable substitutes, he added.

The market would be roughly in balance if not for investors’ taste for silver coins and bars. This year’s silver rally has been driven in part by investors looking to precious metals as a store of value on signs of weakening in the U.S. economy, according to Max Layton, global head of commodities research at Citi Research. Expectations of lower rates are another reason why: Demand for noninterest-bearing assets tends to rise when rates decline. Gold prices have appreciated precisely for those reasons, and silver prices are historically linked to gold.

For now, there is still plenty of silver stacked away in vaults to cushion deficits. There was about 15 months of annual mined silver supply stored in London and exchange-registered vaults at the end of 2023, according to a report from the Silver Institute. But those inventories have dwindled about 26% over the past two years. The Silver Institute and Citi Research each expect another market deficit in 2024, which implies that aboveground silver stocks could fall further.

What else might drive silver prices even higher? Worth watching is China, where Layton says weakness in the property and consumer sectors is driving up appetite for silver as a store of value at the same that the country’s aggressive build-out of solar energy and electric vehicles is stoking demand for it as an industrial commodity. This differs from commodities such as oil, which are negatively affected by China’s so-called bifurcated economy, and other metals such as gold, which enjoy retail demand from weakened property prices but not so much from the clean-energy transition.

Notably, China in August issued quotas on gold imports for several Chinese banks, according to a report from Reuters. This might be diverting retail investment toward silver, according to a report from Citi, which notes that the country’s silver-bullion imports—a proxy for retail demand—went from almost nothing to more than $100 million earlier this year. If China shifts to buying silver at just 10% of the pace it has been buying gold, that could lead to demand that equates to about 20% of mined silver supply, according to Citi.

Another catalyst worth watching is the Fed’s trajectory. If the central bank keeps cutting interest rates, that could stimulate more demand for gold and silver. Secondarily, if lower interest rates encourage more industrial activity in the U.S., especially debt-reliant solar projects, that could further drive up silver demand.

Silver remains cheap compared with gold: For the price of 1 troy ounce of gold, an investor can buy roughly 83 troy ounces of silver. That is a bargain compared with the past two decades, when that ratio averaged 67. And while silver has rallied this year, its price is well off the highs reached in 1980 and 2011.

Silver seems poised to sparkle a while longer.

Write to Jinjoo Lee at jinjoo.lee@wsj.com