Subdued year forecast for silver

A recent rally pushed the price of silver over $7(US) per oz, but the precious metal will be hard pressed to maintain that price level this year, writes the London metals research unit of the international investment securities firm, Shearson Lehman Hutton, in its Annual Review of the World Silver Industry 1988.

Silver averaged $7.02 last year and for 1988, Shearson is forecasting an average price of $6.50 (which is about what the precious metal has averaged so far this year). The researchers say that if industrial activity continues to give rise to inflationary fears, and if the oil market strengthens as expected, then 1989 should see higher prevailing ranges and an average 10% better than this year.

The oil market, the report says, is pivotal to silver in the coming year-and-a-half, and any sustained weakness in price or shortfall in Mid-East revenues could stifle silver’s hopes of rejuvenation.

Justifiable fundamental strength in oil markets will enhance inflationary concerns and give added value to silver in the medium term. However, in the short term, fluctuations in oil revenue accruing to the Mid-East consistently affect silver prices (in both directions) because of the importance of the Mid-East in the marketplace, the report says. Coin demand

Coin demand, reflecting grassroots interest and comprising a significant proportion of investor purchases, should remain strong, particularly with the Olympic Games commemorative coins boosting interest in the autumn.

“During 1987, silver led something of a Jekyll and Hyde existence, spending half the year trading as an industrial metal and half as a precious metal,” the Shearson researchers write. Values ranged between $5.36 and $11.40, and spent most of the year between $6 and $8.

This year, with a fine balance in the West between steady economic growth and inflationary fears, Shearson expects the market to oscillate, for the most part, between $6 and $7. Having opened the year towards the highs, and then retreated with gold, the market should give a solid performance through the summer and autumn with renewed attacks on, and indeed clearance of, $7 before year-end. The researchers caution that speculative rallies could be explosive.

Both supply and demand of silver have resumed an upward tack, the report says. Mine supply this year is expected to clear 11,000 tonnes for the first time, with the U.S., in particular, posting a remarkable rise in production.

The U.S. situation will stem from a large increase in silver produced as a byproduct of gold mining, plus the beneficial results of the entire U.S. mining industry’s rationalization of recent years. The same exercise is also bearing fruit in Canada and Australia, the researchers note. Small-scale production

Latin American output is scheduled for improvements in 1988 as local small-scale production is encouraged as well as commercial- sized operations. However, Peru, Shearson says, is becoming the Latin American equivalent of Zambia in the early 1980s, with equipment shortages and little foreign exchange with which to make the replacements.

Fabrication, says the report, has also turned the corner with the downsizing and substitutions of recent years now fully discounted into consumption patterns. Future offtake levels, firmly underpinned by a healthy photographic sector, will, on the whole, run in line with industrial production, the report says.

Mexico continues to be the non- Communist world’s leading silver producer, followed by Peru, the U.S., Canada and Australia. Silver production in Canada continues to be closely associated with the copper, lead and zinc industries; three out of the four largest silver miners in the country are mainly lead and zinc producers.

Total supply in 1988 of the precious metal is forecast to be 15,468 tonnes, made up of 11,268 tonnes of primary production and 4,200 tonnes of secondary (mostly industrial scrap) supply. Total consumption this year will reach an estimated 13,850 tonnes. Investment activity

The report concludes that in terms of supply-demand fundamentals, while the market remains in oversupply, the surplus material will be absorbed by a steady undertow of investment. “The massive stocks built up over many years and perceived to be overhanging the market are losing their significance, as any material which was not tempted into the market during the spike to $50 (per oz) in January, 1980, is not going to be drawn forth at values below $20 now,” Shearson says.

“Of more importance is the buildup of 6,900 tonnes of bullion stocks since 1985 when the market dropped into the $5 environs, as any purchaser at those levels may sell into any strength towards $10. This, therefore, is likely to put a dampener on speculator-driven rallies. The potential for such rallies is clearly present, however, and silver now looks to be back in its old role.”

The authors of another report, the Annual Bullion Review 1987 of Samuel Montagu & Co. of London, are of a similar view regarding silver’s price movement in 1988. The company doesn’t foresee the 1988 average price exceeding last year’s and writes that “at between $6 and $7 per oz and at current exchange rates, silver seems to be fairly valued at a level with which both producers and consumers are comfortable.”