What’s Going On With Silver?

April 10, 2014

According to many analysts surveyed at the beginning of the year 2014 was not supposed to be a good one for silver. In fact in January we reported that many silver forecasts saw the silver price averaging around $21 per ounce. We are now in a mind-set where any activity above $20 per ounce is greeted with positivity and chatter about a recovery in the price.

Is this what we have to look forward to? Pop-ups above $20? We take a look at what’s been going on this year and a couple of the issues affecting the price of silver.

2014’s silver vs 2013’s silver

2014, isn’t looking quite as bad as last year, when the price of silver fell by nearly 40%, compared to the price of gold which only fell by around 3%. Last year it seemed silver was on a winning streak and close to touching new highs. In March it rose to $32/oz, however it was unable to maintain this momentum as both gold and silver were taken out in the April.

At the time of writing silver investors have had a particularly painful March, with a rocky ride in the two months before. Quarterly and year-to-date gains for the white precious metal are just 2.5%, low compared to earlier 16% gains prior to quarter-end. In the final week of March silver-futures experienced their longest slump for over 13 years, in the final 6 days of the quarter the metals returned 5.4% of gains.

By mid-March precious metals looked like they were going to show the bears a thing or two, but only half-heatedly. Gold was up by just 12%, but this wasn’t as disappointing as silver’s mere 7% rise. Since then both have fallen below key levels and silver continues to underperform both its yellow counterpart and the more industrial precious metals.

In the last few days it just hasn’t been able to make up its mine, pushed over $21 after the weak non-farm payroll data last week, it is now back below $20.

Industrial silver versus monetary silver

Of course the metal is the more industrial of the two monetary precious metals, it is estimated that 75% of silver mined is used in industry.

Given the fall in the gold price is being attributed to an improving global economy one would think that silver would be enjoying the fruits of a recovering economy.

Whilst silver is an industrial metal, it is its role as a monetary metal and investment safe-haven that has driven the price in recent years. Whilst it hangs on gold’s coat-tails (it climbs when gold climbs and vice-versa) it tends to rise faster than gold and fall faster as well. Industrial demand may climb with some form of an economic recovery but it its performance is still highly connected to gold.

Many gold and silver bugs will mention the gold-silver ratio and use this as a reason as to why silver is so under-priced at the moment. 15:1 is the oft most cited ratio (not seen for over three decades) but at the moment it is around 64:1. In recent years it has remained between 30 and 70. The ratio may come down somewhat as silver’s industrial usage picks up.

Whilst silver’s fall exceeded that of gold, it was physical silver demand which was notably impressive last year. Not only were record coin purchases reported but also demand for silver bars was notable. Mineweb recently reported on the growing number of silver vaults in Singapore, in July Malca Amit’s 200-tonne silver vault was reported to be full. Just last month Silver Bullion Pte, a Singapore gold and silver retailer opened a 600-tonne vault.

Interestingly one area where silver has not followed a gold trend is in ETFs. For the third year in a row, assets in silver backed exchange-traded-products rose. This year they have climbed by 2%, whilst gold ETF outflows continue.

The price has an element of the feel-good factor to it. Both gold and silver are monetary metals, so if you can by 40 times more silver than gold, why wouldn’t you opt for the former? This was most noticeable in the reported coin sales from the world’s major mints.

Of course as a safe-haven and partial shadow to gold, silver needs to look out for central bank decisions and any data that may affect them. Silver’s takedown in March was in part thanks to Yellen’s comments over an interest rate hike in 2015. In the short-term the metal is highly sensitive to any announcements or hints of this kind. In the long-term it is, of course, also highly sensitive to any monetary events.

Silver supply

What could make silver stronger this year? Obviously the answer depends on demand versus supply.

Because of silver’s role as both an industrial and investment product, there are some market participants who believe that in the near future demand will exceed supply. The ‘tug-of-war’ between investment and silver demand is something that could put a real squeeze on supply and therefore upward pressure on the price.

HSBC believes the silver price will trade between $17.75 and $22.75 this year, thanks to the widening global silver surplus, which is expected to be 156moz this year. One wonders how this can be possible given the low price versus the cost of mining silver.

In the third quarter of 2013 the cost of silver production averaged $21.39/oz, whilst the price of silver fell 40%.

According to HSBC, however, the fall in the silver price to below $20/oz does not mean that production will stop or even slow down.

“A break below USD20/oz, however, would not necessarily result in automatic production cuts. We see no price-related threat to output as long as silver remains above USD15/oz. And, even in the event of another plunge, prices would have to remain below USD15/oz for a considerable period before we were to see price-related reductions in output schedules, we believe.”

There is, of course, the possibility that this will boost the price of silver, which is currently trading below the cost of silver production. Selling silver at a deficit may force some mines to close. However, on the flip side of this some analysts believe it will be some time for this scenario to come into play and then it will have an impact on price.

As we mentioned when there were concerns over the gold production, the major costs involved in mining metals are sunk costs, especially in mining projects where silver is a by-product.

How likely is this to take place? With the closure of many base metal mines, of which silver is often a by-product of the mining process, there is likely to be a squeeze on the supply of freshly mined silver. This reduced supply of physical silver will no doubt affect the precious coin industry which has seen impressive demand for silver coins in the last year.

But how much does the supply of silver rely on fresh mine supply? A recent video from Moments in Trading points out ‘the actual amount of silver that can be reasonably assumed to be mined out at current economic conditions, using current technology, is only a fraction of silver in the ground. The amount of silver that can be mined out is not in short supply or in any way running out soon.’

India’s demand

In 2013 the silver price and physical silver demand was supported by India’s imports. Silver certainly lived up to its reputation as a cheaper alternative to gold. As restrictions were ramped up on gold imports in the first half of 2013, silver imports rocketed. Last year silver imports were an estimated 4,800 tonnes, compared to 1,900 tonnes imported in 2012. Much of this was imported during the first six-months of the year following the dramatic drop in the silver price.

Between April 2013 and February 2014 exports of silver jewellery climbed by 109% according to data from the Gems and Jewellery Export Promotion Council. This is, in part due to the shortage of gold in the country, however some of it is down to an advancement in technology within India’s jewellery industry. These advancements make India’s silver jewellery

Should gold imports be relaxed then there is likely to an increase in gold demand, at silver’s expense. Already beliefs that restrictions will be relaxed are having an impact on silver demand as is the increase in silver import duty.

In March this year silver imports were 250% lower than those in March 2013, given India’s demand accounts for 20% of global demand a significant fall could put further pressure on the price.

Another golden threat to silver is the fact that more banks have been given permission to import gold. This may lower the domestic price of gold as the readily available supply of the yellow metal increases.

However, it isn’t just India who have records to report on silver jewellery demand. In North America, jewellers are reported to have seen increased sales in 2013. 46% of those responding to a National Jeweller survey said that they had experienced the best inventory turnover rate in 2013.

Can we believe the price?

As many readers will recall, the Gold Anti-trust Action committee have been convinced for many years that the price of silver is manipulated. After many years of legal wrangling, the US Second Circuit Court of Appeals, ruled last month that the 44 plaintiffs who accused JP Morgan Chase & Company of conspiring and manipulating the COMEX silver futures price, has legally failed to show evidence of this behaviour.

How will price manipulation (if going on) affect the price of silver? If the price of silver truly is being manipulated, i.e. the excessive short-selling on COMEX is to push the price lower then it is inevitable that the laws of supply and demand will come in to play eventually.

In the short-term

We should all know by now that no-one can predict what will happen to the price of gold or silver. Not only is silver highly sensitive to any movements in the gold price, but also to any industrial and mining sector events. As we outline above, any changes in mine supply are likely to play out in the price over the medium to long term, the key factors to look out for at the moment are geopolitical and economic events.

But all of those factors above, lead to one scenario in the long-term; a shortage of silver (a finite resource) and unsustainable economic policies that will continue to push safe haven demand into gold and silver.


Jan Skoyles


Gold ETFs outflow reaches Rs 462 crore in Apr-Aug of FY'17