The knock down the silver price experienced towards the end of last year may have spooked many considering silver investment, however market analysts and the fundamentals are all pointing to big gains in the next year suggesting now might be the opportune time to buy silver bullion.
Whilst silver’s drop last month might be the overlying memory for those looking back at silver in 2012, we mustn’t forget its stellar performance since June lows of $26.13 rising to above $33 in early December. According to a survey carried out by Bloomberg, analysts, traders and investors see the silver price rising around 29% in 2013.
Back in November we outlined how we expected Barack Obama’s re-election to impact the gold price. Whilst we didn’t look at silver as well, we fully expect this political event to have exactly the same impact, silver was after all one of the best performing financial assets in Obama’s first term. It has nearly tripled since 2008, coming second only to platinum, thanks to increasing promises by Obama and other Western governments to ease the system through the financial crisis.
Silver’s industrial nature
In recent years we have seen silver investment demand compensate for any slowdown in industrial demand. This is expected to continue into next year as investors continue to work to protect themselves against currency devaluation, more of which is expected in 2013. 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.
Whilst silver’s volatility is often blamed on its industrial uses (53% of silver is used in industry), this is also its saving grace. A recent survey commissioned by the Silver Institute finds industrial demand has declined by 6% this year, to 454.4 million ounces, although these will be more than made up for next year and more so in 2014 when industrial demand is expected to reach record levels of 511.6 million ounces.
Currently 70% of silver mined is used for manufacturing, its applications are still increasing primarily thanks to the environmental market where silver is used in solar panels – 40 million ounces of the precious metal was used in such products this year. Demand for it in other industrial items such as medical instruments, phones and food packaging are also increasing.
Silver investment demand
Despite the recent price drop suggesting less people wish to sell silver than buy silver, we cannot ignore the record demand for silver investment this year. Holdings in silver-backed exchange traded products reached a record 18,854 metric tons in November. Bloomberg data shows investors have added 1,464 tons to their holdings this year, bringing the total value of holdings to around $19.2 billion. Ted Butler points out that holdings in SLV have seen more stability in the last year and a half than GLD holdings.
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.
The gold/silver ratio at present suggests silver is undervalued. Even though the ratio was down to 30 at the end of Q1 2012, this didn’t last very long. Having been at 50 prior to the financial crisis, it has pushed near 60 in the last year. At the time of writing it is around 55, meaning one ounce of gold will buy you one ounce of silver. Judging by recent reports many expect this to go down to as low as 20 next year as silver pushes to rise faster than gold.
Silver supply and demand
Speaking of ratios, what about the ratio of silver demand to gold demand, or silver supply to gold supply? Sprott outlined for us late last year that the ratio of availability of physical silver to gold for investment purposes is approximately 3:1. However, demand is for physical silver is well above this, how long is it sustainable for?
As Sprott explained, investors are now buying around 50 times more physical silver than gold. Sprott writes ‘our favourite question to the bullion dealers we meet, is to ask the ratio of their dollar sales in gold versus silver. The answer is that dollar sales are equal, which means that physical silver sales relative to gold are greater than 50:1.’ Elsewhere, ETF silver holdings were nearly ten times in the last five years were ten-times that of gold.
For other analysts the chances of a weak performance from the silver price in the coming year is likely, given what is apparently a large production surplus in silver thanks to the decrease in manufacturing demand. However, given the pent up demand for silver investment a surplus cannot be the case. Once upon a time investors were happy to hold paper-promises of precious metals, but recent events have made them less so. These same investors want to see physical silver rather than worthless scraps of paper.
The LBMA, the world’s largest association of bullion dealers, has seen the number of contracts taking delivery increase significantly in the last year. Between 2011 and 2012, US exports of silver to the UK increased from 19 metric tonnes to 291.
As Laurence Williams points out, this increased demand for physical is taking up an available supply, meaning those banks holding short-positions are ‘playing a very dangerous game indeed’.
The supply position is one which is currently being tested by the Sprott Physical Silver Trust. We are all going to be interested to see how long it takes for the 7.127 million troy ounces of silver bullion to be delivered which was ordered by the Trust in mid-November 2011.
One of the best indicators of increased silver investment demand is silver coin sales. Between 2002 and 2011 official government coins and medals total supply increased by 274%, to 118.2 million ounces. Whilst demand for official silver coins declined in the first half of 2012, they have not suffered nearly as much as gold coins have. In the last year, for example sales of Gold Eagles were down by 36% compared to 2011, whereas Silver Eagles were only down by around 18%.
According to data from the US Mint, the purchase of silver ounces exceeds gold ounces by 45:1. Just three years ago it was less than half that amount.
Speaking of silver coins, as of 2011 it became legal for Chinese citizens to own silver coins. This has seen the minting of Silver Pandas increase from 6,000 a year between 2001 and 2011, to 6 million in 2011 and approximately 8 million in 2012. As the Chinese government work hard to redirect savings into precious metals we may see them work to build the Chinese Panda into a worthy rival to the American Silver Eagle, which may see supply increase to over 40 million per annum.
The continuing investment in silver, and gold, coins suggests we are seeing smaller investors coming to the market who plan to hold onto their investments as a form of wealth protection.
China leading the way once again
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.
As we head into 2013, silver’s move towards (and beyond) $40 seems perfectly feasible. Considering its performance in early 2011 when it appeared as though the world economy was on the rebound, we seem set for a repeat of this as we see the fiscal cliff resolution and China’s positive data put some concerns to one side.
Investment demand appears to be the element which will be the driving force behind the silver price in the next year; we can see this is silver coin sales and the amount of silver being exported to the UK. As the global economy continues to deteriorate we see increasing numbers of investors taking delivery on the back of paper contracts.
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