Searching for a silver lining

Thomson Reuters GFMS presented their Interim Silver Market Review at the Annual Silver Industry Dinner, in New York on November 12, and while the report points to some distinct advantages that the metal has when compared to the other hard-luck precious metal, gold, the news still isn’t all that good for silver bugs.

GFMS has built its reputation in the metal forecasting game by providing the most thorough research into all relevant elements of the silver market, and it begins the latest resport with the most fundamental factor in the market: fabrication demand. GFMS argues that demand should grow for the year across all sectors except photography, where digital photographs have all but done away with demand for silver in the production of film.

Somewhat ironically the overall good news on the demand side is partly a function of the bad news on the pricing side. With the price for the metal falling 37% year-to-date it is cheaper for end-users of the metal to acquire it, which has led to a boost in demand. GFMS expects demand in the jewellery market to grow by 6% for the year, while silverware demand should also be up by 6%. The report also said that, along with lower prices, that an improving global economy is also helping on the demand side.

As for what caused the precipitous drop in the first place, the report argues that as with gold, concern that Federal Reserve in the U.S. would taper its US$85 billion monthly bond and mortgage backed securities purchases before any signs of runaway inflation emerged, lessened demand for storable commodities like silver and gold, and thus the sell-off began.

Silver managed to decouple from gold, however, in the ETF market. Gold ETFs saw considerable selling this year, while silver ETF holdings continued to grow and in fact hit a record-high of 655 million oz. as of October 31st. Mirroring that movement to the upside was increased demand for silver coins, as GFMS expects that by the end of the year silver coin sales will be up 19% year-over-year.

And while ETF, coin, jewellery and silverware demand is all up, supply from mines is not expected to keep pace. Mine production of silver is expected to be just 4% higher this year than last year at 815 million oz. Most of that production growth is expected to come from the U.S., Mexico and Dominican Republic.

Despite mine production growth not keeping pace, the silver market continues to be in surplus, indeed at a widening margin as supply is also derived from the scrap market. The residual market surplus is expected to grow this year for the eighth consecutive year as it is set to finish the year at 287 million oz.

Two other factors that could work against the metal going into next year is the aforementioned secular decline in photography demand and a global economic recovery that could bring expansionary monetary policy to an end, which would hurt the value of both gold and silver.

But there are some positives to consider, as well. The study points to the metals advantage over gold in an improving global economy as it is considered an industrial metal. Any uptick in industrial demand for the metal would provide a cushion in its pricing that gold does not enjoy.

Also the much talked about gold-to-silver ratio is currently at 60, which is lower than the average of 55 over the past three years. That could point to an opportunity for silver to outperform gold in the coming year.

Still the company adjusted its full-year price estimate for the metal downwards, from US$24.51 per oz. to US$24.24. It says it expect the metal to trade between US$20.20 and US$23.70 per oz. for the rest of the year.