Whats Up Next For Silver?

August 27, 2013 at 08:52

truthing

In January commentators felt confident enough about silver that we all wrote about how 2013 would be silver’s year. It was a hard sell even then, the price had climbed to $33 at the beginning of December 2012 to then just above $29. But that drop seems like nothing compared to the fall to $18.61/oz we saw at the end of June.

Why is it down by so much? At the beginning of the year top analysts were predicting the price to climb 29% in 2013. Their optimism was not surprising, and it is even less so today. Compared to gold the environment appears pretty welcoming to the precious metal.

Silver has climbed to $23.23 this week and is expected to climb higher, but the precious metal is still down by nearly 23% on last year. In contrast gold is down by 17%.

In the short-term many analysts expect the silver price to fall given the sentiment surrounding tapering and how it will affect the gold price. However, in the long-run a reduction in bond-purchases indicates that economic recovery is on its way (so the FOMC likes to think) thanks to a pick-up in industrial activity. Which, in turn, means increased silver demand.

Whilst the paper silver trade may work to push the price lower, supply/demand fundamentals are likely to kick in and provide support to the price.

We take a quick look at some of these key fundamentals and notice that they’re looking even healthier than gold’s.

In the world’s largest gold consuming nation the government has waged a war on gold. Silver, in response, has stepped up to the plate and taken its place as an alternative savings vehicle and jewelry material.

Whilst Indians have struggled to take advantage of the low gold price (thanks to strict restrictions on imports and new export rules) the low silver price and lesser sanctions mean investors and jewelers are turning their favor toward the metal.

Experts on the industry discuss how erratic India’s silver imports have been in the past. Whilst gold imports have (until recently) been relatively stable, silver imports have occasionally been zero. But it seems the tables are turning.

Between April and July this year, silver imports increased by 258.65% from the same period last year. Gold imports have grown by 104.27% and in the last couple of months by very little.

It’s not just imports that are booming but the whole silver trade. India’s Gems and Jewellery Export Promotion Council released data this week that shows silver jewelry exports increased by a whopping 184% in July compared to the same period last year.

This pick up in silver’s popularity in silver may not just be thanks to the government’s war on gold. A leaning towards silver jewelry has been coming for some time as high gold prices and Western fashion begin to influence exports. Mineweb report that ‘during 2011-12, silver jewelry exports grew to 44% compared with gold jewelry export growth of 30%. India jewelers said they had found a new class of buyers in the West who were keen to invest less than $100 in jewelry.’

The second big headline, is of course silver Eagle demand. Like ETFs (see below) the demand for silver coins is insatiable but gold appears to be out of favor.

Silver Eagle sales, according to the US Mint are currently up 47% compared to the same period last year. The Mint expects weekly allocations of between 800,000 to 900,000 coins to continue. In contrast gold Eagles, whilst still popular have only sold 91% of last year’s figures.

This is not an uncommon trend, several mints from around the world have reported similar phenomenon. The US Mint has admitted to struggling to stock up on silver coin blanks and were ‘forced to allocate coins to our authorized purchasers.’

Silver’s volatile nature can often be blamed on its industrial uses as 53% of silver is used industrial purposes. However this is also its saving grace. A recent survey commissioned by the Silver Institute finds industrial demand has declined by 6% this year, to 454.4 million ounces, although these will be more than made up for next year and more so in 2014 when industrial demand is expected to reach record levels of 511.6 million ounces.

Currently 70% of silver mined is used for manufacturing, its applications are still increasing primarily thanks to the environmental market where silver is used in solar panels – 40 million ounces of the precious metal was used in such products this year. Demand for it in other industrial items such as medical instruments, phones and food packaging are also increasing.

Last year China, after the US, was the world’s second-largest silver consumer. But as of June this year imports were down by 12% for the first five months of 2013. However reports released this week suggest there is a pick-up in industrial activity, a positive for silver.

As we alluded to at the beginning, mutterings of a global economic recovery suggest a pick-up in demand for the precious metal. Additionally the more silver used in industry the greater the supply constraints which in turn boosts the price.

Currently the GSR is around 59, a vast improvement on that seen a couple of months ago when it was 66.

The ratio was down to 30 at the end of Q1 2012 but this didn’t last very long. When we wrote about silver in January we commented that the GSR had ‘pushed near 60 in the last year’ but was (at the time of writing) around 55, meaning one ounce of gold would buy you one ounce of silver. At the beginning of the year many expected this to go down to as low as 20 in 2013, as silver was expected to outperform gold.

How low can it go? Silver Guru, David Morgan believes it could head for 16:1. It hasn’t seen levels that low since the time of the Hunt Brothers, but this is close to the historical average. For now we believe it is comfortable between 35 and 60.

Interestingly the demand ratio of Silver Eagle to Gold Eagle coins is 45:1, this suggests people are spending equal amounts on silver as they are gold. A trend which was first noted by Sprott and I suspect is likely to continue.

Banks appear to remain bearish on the white metal. Last month UBS revised downward their forecasts for both this year and next citing its pressure from gold, echoing the thoughts of many banks. Yet I wonder if gold will in time become more reliant on silver, we may be seeing a reverse in authority between the two metals.

Whilst gold ETFs have suffered major outflows, silver backed ETFs have recently climbed to above a record 20,000 tonnes. Last week when the silver price surged by 19% in just eight days, ETFs recorded 674 tonnes of inflows. In contrast, gold saw just 975 tonnes of inflows since January.

Germany’s Commerzbank noted this impressive activity from silver and suggested that gold’s recent run up may have been thanks to silver, rather than the other way around.

This strong activity in silver-backed ETFs is likely to remain, as Ted Butler once pointed out holdings of SLV are ‘much more diverse’ than those of GLD, for example institutional holders of SLV only account for 16% of total holders, compared to 41% in GLD. The fact that we haven’t seen huge outflows from silver ETFs suggest they are holding out for the long-term.

And finally what about the currency in the opposite corner of the ring?

We could go all day about the US dollar, economy and bonds but that’s for another time. In the long-term it is worth reminding ourselves that over 80 years ago $100 would buy you 400 ounces of silver, today it would only get you four ounces. With each decade that passes you get less silver for your bucks, but more bucks for your silver.

With the year that both gold and silver have had, no one knows how they might finish it. But we feel assured that the two drivers of price – supply and demand – look set to play their part well.