5 reasons why silver price is not higher
NEW YORK (Oct 14) In response to the confusion around what's going on with silver prices, StoneX held a silver webinar, describing the precious metal as a Cinderella metal and giving five reasons why its price is not higher.
According to some estimates, silver prices should have seen a bigger rally this year due to the vibrant global coin demand and the recovery in India's physical demand. So why isn't that the case? StoneX listed five reasons.
1. Anaemic gold price performance
2. Professional disinterest — ETP and CFTC holdings are down
3. LBMA silver vaults provide ample silver supply
4. The physical market is much smaller than the professional market
5. Spot price does not respond at the grass root level, but local premia do
For example, StoneX said exchange-traded products (ETP) holdings are down more than 4,000 tons year-to-date to just under 24,000 tons. COMEX inventories are down to just under 9,700 tons from 11,064, Rhona O'Connell, head of market analysis for EMEA & Asia at StoneX, pointed out.
And if you add a reduction in LBMA holdings, which is 9,000 tons this year, it comes to 414,500 tons, equivalent to 22 weeks of global industrial demand, O'Connell explained.
"In principle, it looks like the market is being well fed by these reductions, and that would be one of the reasons why the spot price hasn't moved when compared to the reports of very strong physical demand," she explained.
Positioning in the silver market has also played an important role. "COMEX silver has seen short covering. At the start of September, the outright short within the managed money component was 9,420 tons, and that's the largest since July 2019. It's contracted over the month to 6,814," she noted. "That's still reasonably substantial because the average over the previous 12 months was 5,204. There's more short covering to go if we're thinking about reverting to the mean."
O'Connell also added that a large net short does not necessarily lead to a strong short-covering rally.
Next year, StoneX expects markedly higher gold and silver prices than the current trading levels, but it does not see the gold-silver ratio returning to its long-standing average of 60. The current ratio, which implies how many silver ounces are required to buy one ounce of gold, is at 88. At the time of writing, December Comex silver price was at $18.86, down 0.41% on the day.
"It's a long way from 60, and it's very difficult to foresee the circumstances in which we will see a reversion to the mean," she said.
If silver is the Cinderella metal, then the wicked stepmother and the younger sisters are the world economy and the U.S. dollar, joked O'Connell. The question is, how many times has silver left at midnight and how many times is there a happy ending?
O'Connell pointed out that silver can be very volatile, and investors need to be prepared for lots of excitement that could end with a plunge back to where the metal started or even lower.
In 2022, the silver supply will return to surplus because of the redemptions in the ETFs. "We're currently looking at a surplus of about 2,200 tons this year or just under the equivalent of three weeks' demand," O'Connell stated.
In 2021, Mexico, China, and Peru were the top three silver producers by country, accounting for 51% of the world's silver mine supply.
Also, total cash costs for primary silver mines were $3.88, while the all-in-sustaining costs were $10.88. In comparison, the average silver price for the year-to-date is $21.86. "Under normal circumstances, silver supply is continuous and relentless," O'Connell described.
India is one of the reasons why many expected silver prices to be much higher. Since May, there have been strong flows into the country. "This revival was the release of pent-up demand following an awful 2020 and 2021. One leading importer has reported that Indian investors are looking for silver in its role as poor man's gold … expecting the silver price to outperform," O'Connell said.
In terms of future predictions, StoneX sees silver keeping its close relationship with gold and copper.
Silver is predominantly driven by gold, which is driven by the U.S. dollar. "We are likely to see the dollar topping out next year because of worries around emerging market debt and higher rates," noted O'Connell. "If the dollar remains too strong for too long with rising rates, we could be walking towards precipices of financial stability regarding emerging markets. Central banks are likely aware of this."
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