Silver looks to outshine gold

Metals analyst Jeffrey Christian of the CPM Group in New York started his silver forecast with a bit of flag waving.

Following the gold forecast at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto, Christian noted that silver enjoys all the same benefits that its more attention-grabbing yellow counterpart has as a hard asset alternative to holding paper money, but also has the added advantage of being an “industrial metal in tight supply.”

The situation has helped to propel silver up into the US$20 per oz. mark and while the higher price tag means a decline in jewelry demand, he contends that investment demand and industrial demand for the metal are outpacing such losses.

Despite that strong demand, however, stockpiles of silver remain in surplus, a situation which counter-intuitively, bodes well for the metal, according to Christian.

A deficit in silver materializes when fabrication demand is greater than total mine supply triggering investors to become net sellers. This is the normal scenario on the silver market.

A surplus in silver, however, results in investors becoming buyers and driving prices up. Historically there have only been three periods when silver was in surplus, and the third time is the present period. The resultant buying of silver by investors, Christian says, is the single biggest factor driving silver prices.

On the supply side, Christian says mine production is set to increase to 100 million oz. over the next ten years as large projects like Apex Silver‘s (SIL-N) San Cristobal, and Coeur d’Alene Mines‘ (CDM-T, CDE-N) San Bartolome ramp into full production. Both of those projects are in Bolivia, a country whose silver production is slated to provide 40 million of the 100 million anticipated ounces.

Tracing the industrial demand for all of those ounces has become slightly more complex with the decline in one of its primary uses: camera film.

As photo use decreases with the growth of digital photography one might expect industrial demand to take a heavy hit. Not so, says Christian. In India alone industrial demand is up 15% as the metal is going into more electronics and batteries.

Overall fabrication demand was down 1.5% last year but is anticipated to be up 2% this year.

Demand is also coming from the Middle East, where people value silver medallions as an investment. To meet that demand India is buying silver at a discount and shipping medallions there.

With such positive drivers behind the metals price over-exuberant silver investors that look backwards to see the future may be feeling justified.

Some investors point to 1980s US$48-per-oz. price as a harbinger for what the rest of the year has in store for silver prices, but Christian offered some sobering words.

“Because a price reached a certain level in the past does not mean it has to reach that price again,” he said and then went on to deflate expectations further with some history.

He pointed out that the cherished US$48 per oz. mark actually only lasted for one day. A month later it was down to US$33 per oz. and later in the year silver managed a remarkable 50% decline in a single day from US$22 per oz. to US$10.80 per oz.

The average price for silver in 1980 was $21 per oz. per oz. a solid figure to be sure, but no where close to the US$50 neighbourhood that some dream of silver residing in.

That is not to say, however, that Christian isn’t bullish on where silver prices will end up.

Drawing back to his theme of comparing silver to gold, he pointed out that while there is as much as 2 billion ounces of gold bullion in the world gold reserves, there isn’t nearly that much in silver, making it “a lot more interesting.”

That is unless all the vanishing silver were to re-appear.

In a lighter moment, Christian told the crowd that while 90% of the historical gold production is accounted for, only 50% of silver is.

The reason for the disparity? People don’t value their silver as much as they do their gold.

If prices keep climbing however, one day soon they just might.