Silver in doldrums, unable to excite investors

Hovering of late in London just above $5(US) per oz, silver seems unable to overcome its problem of oversupply. The precious metal, which averaged around $5.50 to the end of September, is down from its 1988 average price of $6.53 and its 1987 price of $7.02.

Some comments of analysts tend not to be favorable. Securities firm Barclays de Zoete Wedd of London says the silver market “continues to follow gold and is likely to be dull over the next five years (apart from the occasional spike) due to oversupply, especially of secondary production.” Company researchers predict an average price of $5.50 for 1990.

Another international broker, Shearson Lehman Hutton, has a similar message, projecting “little prospect for a sustained upturn in silver prices over the next 18 months.”

The firm, in its Annual Review of the World Silver Industry 1989, foresees a possible price recovery toward $6 during the next six months because of seasonal strength from industrial consumption. “However, the dynamics of the fundamentals clearly suggest that without a return of the North American investor by mid-1990, prices could again be pressuring the $5 level at the end of next year,” write the researchers.

Statistics supplied by the company for non-communist world silver balance show a total 1989 supply (mine production and secondary) of 16,583 tonnes, and a total fabrication (industrial and coinage) of 15,348 tonnes. For 1990, total supply will grow to a projected 17,407 tonnes, with total fabrication amounting to 15,954 tonnes.

Secondary supply of silver (mainly from old scrap) accounts for about 30% of the total supply.

Physical investment activity related to silver is concentrated in the U.S., which because of the general financial market has not been working to the metal’s advantage the past year and a half. The Indian subcontinent and Middle East tend to look at silver as more of a trading medium than investment item, while in the Far East gold appears to be the favored investment metal.

Shearson says the only potential for an inflation-driven price run-up would be a situation similar to 1988 when higher food prices spurred inflation fears, which in turn sparked the market. The higher prices then were short-lived.

“This market’s likely framework over the next 18 months suggests any similar rally in the period would have the same impact: sharp, temporary and ultimately negligible in terms of over-all trading ranges,” write the researchers.

Shearson’s “best estimate” price for silver for 1989 is $5.50, and for 1990 in the $4.85-6 range. Mine production of silver in the non-communist world is expected to increase by 17% during the 2-year period 1988-90, despite the lower price. The reason is that new production is turned out mainly in byproduct form by base metal mines. Primary silver-bearing mines, Shearson says, account for no more than 35% of total output.

“Between now and the end of 1990, a number of very large base metal and gold mines are either coming up to capacity or due to commence operations, many of them carrying significant silver byproduct,” Shearson says.

Five countries accounted for, on average, 72% of the non-communist world silver output between 1985 and 1988: Mexico, the U.S., Peru, Canada and Australia. Next year, that total is expected to rise to 74%, with output growing in particular in North America and Australia.

In Canada, Noranda is the largest silver producer, thanks to interests in a number of base metal mines. The company’s recent purchase (50% interest) in Falconbridge will further boost its status, the Kidd Creek operation of Falconbridge at Timmins, Ont., being a significant producer of the precious metal.

Smaller players with growing silver production include Papua New Guinea, Chile and Bolivia.

Silver offtake grew strongly in 1988, Shearson reports, because of active photography and jewelry markets. A positive outlook is projected to the end of 1990. Usage of silver in the automotive and construction sectors may slow, but photography should remain strong.

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