Silver rallies will be shortlived

Silver may struggle to hold $8(US) per oz for much of the summer before an improvement during and after the autumn, with the price for 1987 realistically averaging $7.50, Shearson Lehman Brothers reports in its Annual Review of the World Silver Industry 1987.

The precious metal, which averaged $5.45 in 1986, has been averaging about $6.75 this year. Silver’s high for this year is $11.25.

Any rallies over the next 18 months, Shearson predicts, will be swift, of the order of 100%, and shortlived, followed by a longer, shallower downward drift. (While referring to “average prices” in its own report, the firm cautions that sharp rallies tend to distort annual averages.)

In 1988, the outlook is for a stronger precious metal sector as a whole, with silver in particular undergoing volatility. While sharp rallies towards $15 are conceivable, much of the year should see silver towards the lower end of the $7-and $10-per-oz range with an annual average around $8.

Shearson reports that contrary to silver’s 1987 upswing, its price shouldn’t really be sustainable above $6. Supply outweighs demand, the firm points out, with low costs of production and high (and growing) stocks. As well, during 1985 and 1986, silver made no headway despite a 35% improvement in U.S. dollar gold prices. Silver’s volatility

Shearson attributes silver’s volatility, relative to gold, to its lower unit price and thinner investment market. Also, that 70% of silver supply goes into industrial off-take (compared with 15% of gold supply) which tends to affect sentiment. In a neutral or bear market, silver is usually the under-performer and it takes a longer time to turn the corner; it is, however, the first off the mark on any fear-induced precious metal rally, although thereafter its fundamentals re-assert themselves and the onus is on gold to take the lead.

Like other precious metals, silver’s price movement seems tied to gold, which Shearson doesn’t foresee making a run before the autumn. The firm points out, though, that the problems facing the U.S. dollar and the threat of increased inflation, which helped fuel the first rally this year, have not disappeared. Outlook encouraging

The outlook for precious metals in the medium-to-longer term is encouraging, Shearson says, although major advances will not be sustained until the equity markets, particularly Tokyo, break downwards. Current precious metal buoyancy is caused in part by confusion as to whether or not the equity markets have topped. If, as expected, they show further strength through the summer, the precious metal sector will drift for a few months, Shearson forecasts.

The silver market has consistently been in physical surplus throughout the 1980s and is likely to remain so at least until the end of 1988. No more than 35% of new production comes from primary silver mines, Shearson reports; the remainder is mined as a by- or co-product of copper, lead, zinc or gold operations. World mine supply is estimated to be about 10,000 tonnes per year.

The largest component of secondary supplies is the production of old scrap, which Shearson says has fluctuated between 3,500 and 4,000 tonnes since 1984. It is this flow of secondary material which is blamed for the surplus, with industrial and coinage demand continuing to outstrip mine supply.

Industrial fabrication demand for silver continues to rise, underpinned by the photographic sector and aided by a mildly bullish outlook for usage in the electrical and electronic industries. The jewelry market remains disappointing and coinage demand is unlikely to equal its 1986 performance.