A Close Look At The Silver Market

There are several factors, some positive and others negative, that will affect the price of silver going forward.
First up, let’s have the not-so-good news facing the silver price.

In 2013, total supply of silver is expected to climb by around 0.7%, much of this is thanks to the 7% or 28 Moz (million ounce) increase in mine supply but offset by the 8% decline in scrap silver supply.

This leaves the silver market in a residual surplus of 287 Moz (forecast for 2013).

Of course, the other glaringly obvious negative issue for silver is its role as a safe haven during times of economic turmoil, inflation etc. With rumours that everything will suddenly be fixed where does this leave silver along with its gold friend? Well, as we describe below, silver investors don’t seem so convinced that all is well and that they can turn their backs on the safe haven just yet. Added to this silver is an increasingly industrial metal, perfect for a global recovery.

Gold And Silver
So far in 2013, silver has suffered more than gold having fallen by 29% so far to gold’s 22%. Currently the gold silver ratio is around 60 and has averaged 59.4 in 2013. Whilst we frequently refer to the historical average being 15:1, 60:1 has in fact been the average since 2000.

The current silver to gold price ratio favours buying silver. This hasn’t gone unnoticed. Eric Sprott recently reported that coin and bullion sellers are seeing equal amounts of capital being spent on gold and silver, meaning 60 times more ounces of silver being purchased than gold.

In the past three years the ratio has been around 55 therefore the currently higher ratio is very much seen as a positive by the authors of the report who suggest that this may set the metal up for outperforming the gold price in the coming months.

Speaking of outperforming gold, in previous episodes of quantitative easing announcements, silver has outperformed gold – between December 2008 and March 2010 it gained 53%, almost double that of gold.

Silver Investment
In the last ten years demand for silver as an investment has climbed from accounting for just 4% of total demand to 24%.

Whilst silver might appear to be a better buy than gold, it is in fact rarer than the yellow metal when it comes to investment purposes. Eric Sprott believes the ratio of investment grade silver to investment grade gold to be 3:1. Sprott calculates that there is in fact only 120 million ounces of gold and 350 million ounces of silver available for investment.

Whilst gold ETF outflows are regularly blamed for the fall in the gold price. The same cannot be said for silver ETFS and the silver price – so far in 2013 silver ETF holdings have risen throughout the year reaching a high of 650 Moz.

Holdings of SLV are ‘much more diverse’ according to Ted Butler than those of GLD, for example institutional holders of SLV only account for 16% of total holders, compared to 41% in GLD. Therefore when we see huge sell-offs, the majority of SLV holders remain where they are, indicating they’re in it for the long-term.

Silver Coins
Of course the other big story surrounding silver has been the dramatic increase in total fabrication demand which is expected to climb by 4%. This is mainly thanks to the 19% climb in silver coin demand for which the US is mostly accountable for. Between 15 million – 20 million extra ounces of silver have been fabricated for coin production this year compared to 2012.

This year silver fabrication for coins has climbed by over 15 million ounces. Silver coin demand is forecast to increase by 19% in 2013 – a hefty recovery after experiencing a dip in 2012.

Gold has also suffered somewhat on the draconian measures taken by India’s government over gold imports. But what is gold’s loss is very much silver’s gain – between January and August this year Indians imported 4,073 tonnes of silver compared to the 1,921 tonnes in the whole of 2012. The role of silver has an alternative to both gold and sovereign currencies is very much coming into play.

Industrial Silver
One of the other many reasons being touted around to explain the fall in the gold price is the global economic recovery. Again, unlike gold, silver is a highly industrial metal and will stand to benefit from this after two years of contraction when the authors expect industrial offtake to rise by 1% in 2013 on the back of improved global economic activity.

China And Silver
Like gold, China is officially the shining light of the silver investment market. It is now, according to a Silver Institute report, the world’s largest market for physical investment and paper trading of silver futures. Not only are they big on investment, their supply of silver is also growing rapidly, increasing by 281.5 million ounces between 2002 and 2011. Also, by 2011 demand for silver bars and coins in China accounted for 8% of worldwide net purchases of silver, soaring to 17 million ounces.

The report, entitled The Chinese Silver Market, foresees further growth in both supply and demand thanks mainly to state-owned Chinese mining companies’ investment in expansion, and the increase in silver fabrication demand which has grown by 137% in the last 4 years.

So, what does all this mean for the silver price? The authors of the report forecast an average price of $24.24 in 2013. So far this year, the average price is $24.51. A short-term forecast is for gold to trade between $20.20 – $23.70 between now and year-end.