How will the US Inflation Reduction Act affect copper and silver prices?
13:00, 16 August 2022
The US Senate has recently passed the US Inflation Reduction Act. This act aims to reduce inflation through a number of steps, such as curbing prescription drug prices, encouraging domestic energy production and new sources of clean energy.
The US Inflation Reduction Act also includes a spending bill worth about $430 billion, to encourage investment in solar and other forms of renewable energy. With energy prices going through the roof at the moment, due to the ongoing Russia-Ukraine war, this has been hailed as a step towards a greener future.
Silver is a key element for solar panels, with about 20 grams of silver being used in every solar panel. Copper is vital for the green transition as well, being used liberally in solar, hydro, wind and thermal energy due to its high conductivity.
Is the US Inflation Reduction Act likely to boost silver and copper prices?
Silver has risen about 11% from its year-to-date lows and is trading at $20.3 per troy ounce at the time of writing.
Given the importance of silver as a key component for photovoltaic panels, the US Inflation Reduction Act is likely to result in a long-term increase in the price of silver. According to Fortune, the solar photovoltaic industry was valued at approximately $154 billion in 2020, a figure that is expected to increase significantly now that the US government is providing more direct support.
In fact, when it comes to solar energy, silver is actually seen as even more indispensable than copper, due to the fact the precious metal being the most reflective of all metals, as well as being one of the best thermal and electrical conductors of all metals.
Copper also saw a rise of about 8% this month, touching about $3.6 per pound at the time of writing.
Although copper is also used in solar panels, it is not used as much as silver and is more preferred in wind energy, in which generators use about 1900 pounds of copper in each wind turbine. Hydro energy also uses a sizeable amount of copper in turbines, standing at about 800 pounds.
As such, the investment prompted by the US Inflation Reduction Act could see the demand for both silver and copper go up manifold, as manufacturers take advantage of the current market interest to ramp up production. With the energy crisis still in full swing due to the raging Russia-Ukraine war, this may also be seen as a good time to invest even more in renewables.
What is your sentiment on Silver?
Silver prices: long-term historical chart
According to Piero Cingari, analyst at Capital.com, "when viewed from a medium- to long-term perspective, silver is an interesting asset due to its valuations, which are not particularly expensive. The current silver market price is trading in line with the metal's 10-year moving average, and there are no signs of extreme market euphoria. This may suggest that the market has not yet discounted the potential benefits of this commodity should the green transition occur in the coming years."
Silver prices: long-term historical chart as of August 2022 – Photo: Capital.com / Source: TradingviewCopper prices: long-term historical chart
According to Cingari, copper prices do not trade as cheaply as silver from a long-term historical perspective, but neither do they exhibit extreme valuations indicative of an overvalued market.
Concerns about a U.S. recession and a slowdown in Chinese production led to a 25% drawdown from peak this year, thus readjusting historical valuations.
Copper spot prices are about 16% higher than their 10-year moving average. Therefore, the metal could still reap the benefits of the green transition.
Silver prices: long-term historical chart as of August 2022 – Photo: Capital.com / Source: TradingviewWhich are the main copper and silver miners impacted by the US Inflation Reduction Act?
The US Inflation Reduction Act is likely to have a major impact on a number of companies. Anglo American (AALI) is expected to be one of the top companies benefiting from rising copper prices, with the company owning one of the biggest upcoming copper mines in Peru, Quellaveco.
Major silver miners such Wheaton Precious Metals (WPM) and Coeur Mining (CDE) are also likely to benefit from rising silver prices and demand, especially as silver stocks in LBMA registered warehouses have fallen to record lows recently as well.
Will the US Inflation Reduction Act materially boost silver and copper demand in the long term?
The US Inflation Reduction Act has been criticized as a “tax and spend package” that is not likely to reduce inflation, by the Research and Education Director at the American Institute for Economic Research, Phil Magness. He also highlighted that inflation has not peaked yet, despite slightly better CPI numbers in July and that the US Federal Reserve should have been tightening monetary policy much before this.
Investors agree that the US Inflation Reduction Act is likely to boost silver and copper demand in the short and medium term due to increased investment. However, in the long term, the bill is unlikely to be able to fight much against inflation, as it is regarded as doing too little, too late.
On the supply side, this is likely to leave copper and silver miners, as well as renewable energy producers to still battle with rising input costs, worsening supply chains and higher labour costs. This may force them to pass on the costs to consumers. Not only that, but production may also see a slowdown due to this.
On the demand side, with higher interest rates mortgages, energy bills and living expenses and less disposable income, consumers may also not be able to afford relatively upscale goods such as electric vehicles and solar panels, leading to less demand. Until inflation comes under control, this may end up leading to lower demand for both silver and copper in the long term.
In conclusion, a green transition investment package of this magnitude represents a significant catalyst for the long-term trend of silver and copper prices.
However, the global economy's current supply chain disruptions and the negative effects of higher interest rates and inflation on consumer spending could limit price increases in the near future.
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