Why Silver Will Continue to Outperform

September 6, 2013 at 09:28

truthing

Anyone investing in silver last month enjoyed gains as silver exchange-traded funds such as the ETFS Physical Silver Shares Trust (NYSE Arca: SIVR) were among August’s top-performing funds. The funds followed the price of silver upward during the month, which surged about 20%.

Silver has now gained 29% from a 34-month low hit on June 28.

The precious metal gained on the back of several factors, most of which look set to continue in the months ahead.

Here are three reasons why investing in silver now will be a money-making move:

Investing in Silver Reason #1: U.S. Retail Demand

One key reason behind the silver price surge continues to be strong retail demand.

As David Wilson, metals analyst at Citigroup, said to the Financial Times, “Silver is a retail investor metal rather than gold.”

Silver ETFs saw inflows in excess of $100 million in August, unlike their gold ETF cousins.

And unlike gold ETFs, silver ETF holdings have actually increased this year by nearly 6% to 20,082 metric tons. Gold ETFs holdings so far this year have fallen by one-fourth, or 680 metric tons.

Then there is the physical demand for silver in the form of coins.

The U.S. Mint said that sales of American Eagle silver coins so far in 2013 – 33.75 million ounces – have already surpassed the total for all of 2012.

Demand for the coins is quickly heading for the annual record set in 2011 of 39.868 million ounces.

Investing in Silver Reason #2: Silver Demand in India Continues to Surge

Silver physical demand is not centered solely in the U.S. market.

The Indian government’s continuing “war” on gold, restricting imports, is feeding Indian investors’ traditional affinity for silver – the other precious metal.

India’s silver imports have soared since the government raised tariffs on gold imports.

Thomson Reuters GFMS analyst in Mumbai, Sudheesh Nambiath, told the Financial Times that the rate of India’s silver imports so far in 2013 more than doubled from last year’s level. In 2012, India imported 1,900 metric tons of the metal. So far this year, imports have already reached nearly 3,000 metric tons.

Much of the imports come from the United Kingdom. Trade data reveals that silver exports to India in the second quarter alone were 1,415 metric tons. This was three times last year’s number and the highest quarterly total since 2008.

Much of the silver is turned into jewelry, with retail demand for silver jewelry in India likely to rise 20% this year.

Investing in Silver Reason #3: China

China helps boost silver prices in two ways: industrial demand and investor activity.

Roughly one-half of global demand for silver is industrial, stemming mostly from use in electronics and solar power. China is a key component of the growth of silver’s industrial use.

The CEO of Pure Funds, Paul Zimnisky, told Bloomberg, “The lure of it [silver] being an industrial metal is also giving it a boost as expectations of demand in China are improving.”

The latest HSBC reading on manufacturing activity in China rose to 50.1 in August from an 11-month low in July of 47.7. China is the world’s second largest user of silver, and the country’s silver imports grew for the third consecutive month in July.

China’s increased silver investment activity can be seen in figures from the Shanghai Futures Exchange. Trading volumes on silver futures there in the first half of 2013 were up by 36%.

More importantly, silver inventories at the Exchange since mid-February have dropped rather steeply – by 60%.

All of these factors point to higher silver prices ahead.