Every Cloud has a Silver Lining
It must be said that commodities have endured a torrid time of late, but perhaps 2016 will usher in a new era of price stability and higher support levels. One such commodity that is tipped for sharp gains is silver. Currently trading at $14.090 per ounce, this precious metal has gained ground on the COMEX since the Fed rate hike was announced on Wednesday, December 16th 2015. The price of silver moved contrary to expectations and stunned traders by rallying 3.5% when the Fed rate hike was announced. Like gold, silver is inversely correlated with interest rates. When interest rates rise, the USD strengthens. When this happens the demand for silver is expected to decline given that a stronger dollar invariably means weakness for other currencies. Therefore, the price of silver should have declined along with demand when the Fed raised rates by 25-basis points. But that didn’t happen.
Demand for Silver and Supply of Silver
In the years since 2005, the supply of silver has increased by 11% while the demand has increased by 13%. The majority of silver supply comes from mining (80%), but the mining supply is increasing at a decreasing rate. Simply put, the supply of silver is slow to respond to increasing demand. But here is where it gets really interesting: silver demand is inelastic. In other words – regardless of the price, the demand remains the same or increases. This is true of very few commodities in the world – life-saving medication being one of them. Silver simply cannot be substituted for in the vast majority of industrial applications. The trends between 2005 and 2014 are clear:
· Silver Coins and Bars increased from 51.6 million ounces in 2005 to 196 million ounces in 2014
· Silver Electrical and Electronics demand increased from 229.7 million ounces in 2005 to 263.9 million ounces in 2014.
· Silver Brazing Alloys and Solders increased from 52.6 million ounces in 2005 to 66.1 million in 2014
· Silver Photovoltaic increased from 7.3 million ounces in 2005 to 59.9 million ounces in 2014
· Silver jewelry demand has increased from 187.6 million ounces in 2005 to 215.2 million ounces in 2014
There have been notable declines in the demand for silver over the same period, notably silver photography which fell from 160.3 million ounces to 45.6 million ounces. Overall though, the demand for silver has increased from 946.5 million ounces to 1,066.7 million ounces. Supply of silver has increased from 955.1 million ounces to 1,061.8 million ounces. That shortfall is precisely what is going to increase in coming years as the demand for silver continues to outstrip supply. Mining operations simply cannot keep up pace with the demand for silver since the investment needed for exploration and production costs takes considerable time and effort.
The declines in the price of silver are significantly smaller now, and that’s not only due to the price being so much lower. It’s a technical phenomenon known as a falling wedge. If the price of silver moves above the resistance line, the upside potential of the precious metal may hit $50 per ounce. It may well be coincidence, but the price of silver has typically spiked dramatically off the 200-month moving average point. There is no doubt that silver is undervalued. There is no good reason for the precious metal to be priced so low. The demand for silver is increasing year-on-year and this is evident in the world silver fabrication indices. The last time silver was used as part of US currency was 1965. The overall demand for silver remains low by global standards – just $3.2 billion per annum. Based on increasing demand and a new long-term bottom at the current range, the trajectory is clear: up towards the $50 mark.