Towards the end of last year we noticed that The Real Asset Company clients were going hell-for-leather for silver bullion investment. I would guess that during November we sold more silver than gold, in dollar terms. This was interesting given both gold and silver fell and yet there was an almost delayed reaction from silver buyers, who saw a four year lows in the industrial precious metal.
So, it came as no surprise when the Silver Institute yesterday released their World Silver Survey 2014 with the headline ‘Total physical silver demand achieved record level in 2013’. Andrew Leyland, of GFMS was impressed by silver’s performance and said that ‘silver seems to have retained a lot more loyalty than the other precious metals.’
Both gold and silver fell significantly last year, however the yellow metal has climbed by 7% so far this year, proving itself to be one of the best performing assets, leaving silver way behind. The dual-purpose metal has struggled to gain a foothold above $20/ounce as investors worry about industrial demand.
Below we take a quick look at the headlines in the report and what it says about the future of the industry and what silver investors can take away from it.
The headlines
Andrew Leyland pointed towards three major trends in 2013’s silver market:
1. Price-elastic markets – ‘particularly in jewellery and silverware…they were very much price-sensitive moves, with people feeling they could put more silver content into silverware and move away from plated (silver) products into more sterling silverware products.’
2. A big increase in investment silver
3. The impact of lower prices on the scrap market, ‘there was a 24% decline in the amount of silver scrap entering the market in 2013.’
The price
Last year the price of silver fell by 36%, tracking the gold price, which is apparently the metal’s largest year-on-year fall since the mid-1980s. The fall was its second annual double-digit percentage decline in a row.
The Silver Institute’s report, produced by Thomson Reuters GFMS, attributes last year’s record price fall primarily to ‘investor liquidations of silver futures and options positions on exchanges…[and] large-scale sales from investors of physical inventories.’
One can perhaps understand that investors were looking to book profits from silver and invest elsewhere given the performance of other asset classes, such as equities and real estate. As GFMS explains, the investor ‘bearishness about medium-term prospects led a portion of silver’s investor base to book profits on silver assets accumulated in previous years.’
Much demand?
A lot of demand! Investor demand blew previous years’ out of the water.
Whilst silver investors who bought back in 2011 may have been feeling disheartened, some saw the low gold price as an opportunity to buy more pushing demand for physical silver climb to 1,081 million ounces, in 2013.
There was a 10% increase in silver jewellery demand (to 198.8 million ounces) and a 15% climb in silverware fabrication (to 50 million ounces), however these numbers pale in comparison to retail investment: demand for investment bars and coins climbed by 76% to 245.6 million ounces.
Worldwide investment for both silver coins and bars increased by a third. 3,956 tonnes of silver bars were purchased, double the amount in 2012.
India of course deserves a mention when it comes to silver demand. The government’s restrictions on gold imports meant that the supressed demand was redirected into silver purchases, in India demand for silver jewellery climbed by a third to its highest level since 2001.
Meanwhile in China, where they were busy protecting the physical gold market and absorbing all those gold ETF outflows, they were also snapping up silver jewellery. Demand climbed by 29% year-on-year, putting India’s demand in slightly more perspective.
Was there enough silver?
When the price of both gold and silver fell last year there were many analysts who pointed towards mining costs as an argument for a fall in supply of both metals. This didn’t play out in 2013, most likely as pricing issues take time to work their way through the system. In fact, silver mine production grew by 3.4% (819.6 million ounce), mainly thanks to a 6% growth in the primary silver mining sector led by Peru, Mexico and China. The production from primary silver mines contributed a huge 29% of silver supply to the global industry.
The above did little, however to boost silver supply. Scrap supply of silver fell by 24%, the largest drop ‘since at least 1980s [to] the lowest level since 2001.’ This was expected given the low price and therefore lack of incentive for silver to be sold into the scrap market.
Above-ground silver supply fell by 199.7 million ounces, as a result of this decline in scrap supply combined with ‘only modest government sales and a continued absence of net producer hedging or ETF drawdowns.’
This huge drop, combined with significant demand, created a physical deficit of 103 million ounces. This was the largest shortfall since 2008 and left a huge hole compared to the 51 million-ounce surplus seen the previous year.
In regard to future supply, it is worth noting that much of 2013’s gains in mine supply were thanks to advanced projects coming to fruition. The Institute does point out that mining costs in primary mines increased by 1% in dollar terms, which may impact on supply this year should silver prices remain below $20/oz.
Who was selling?
When analysts are comparing both gold and silver’s performance in 2013 many will point towards ETF outflows, of which they were many in gold however silver backed ETF holdings remained relatively stable and increased slightly by 48 tonnes. Despite this, the GFMS produced report believes that there were ‘sales of unreported investor inventories [that] took place throughout the year.’
What about industrial demand?
I am often asked if I think investors should buy gold or silver, whilst I always explain that people should hold both I do always remind them that the amount of available silver is rarer than that of gold and its use in the industrial process means that its scarcity will climb.
When I first joined the precious metals space, industrial fabrication demand accounted for over 75% of total physical silver demand. In yesterday’s report
However, one of the most interesting notes in the report yesterday showed that despite falling prices industrial demand fell for the third-year running. The fall was only by 1%, to 586.6 million ounces, however the continuing trend is noteworthy and is most likely down to the waning photographic and electronic industries. GFMS believes the main reason behind the decline was thanks to a lack of positive macroeconomic factors, ‘the lack of clear recovery impacting on industry investment.’
Not industry, as we saw above. As with gold, rather than seeing the fall in price as a reason to sell the precious metal,
The silver price in 2014 and beyond
The future isn’t looking too shiny for the future silver price, according to GFMS. When presenting the report, yesterday Andrew Leyland of GFMS, said they were looking for an average silver price of $19/oz with this falling to as low as $18.50 in 2015.
If last year saw such robust demand, why such dreary price forecasts? ‘With a stronger US dollar and improved economic outlook we see sentiment towards precious metals worsening. Our base case is to see more investor interest leaving the sector,’ states Andrew Leyland (according to the FT). Similar to many bearish analysts, Leyland points to a ‘rising interest rate environment, and an improving global economy’ as undermining factors for the silver price.
The increase in ‘investor interest leaving the sector’ could be bearish for the silver price, especially as Leyland believes much of this could come from ETF outflows, something not seen last year.
However, ‘an improving global economy’ will surely bring about increased industrial demand? Yes, what the GFMS survey really implies is that the silver price is entering a period of consolidation.
Whilst there might take time to see industrial demand to pick up it is also worth pointing out that a gradual fall in the silver price will mean that silver scrap supply remains low, thereby adding to the 2013 deficit and pushing up supply and demand constraints.
Especially as the research consultancy expects to see ‘many jewellery and silverware producers [to take] advantage of [the low price period] in order to boost production levels and move away from silver plated products.’
I would also expect some scrupulous silver investors to see the next couple of years as a buying opportunity.
What does it all mean?
As with the gold market we are seeing a slow breakdown in the controlling relationship the paper market has over the price. It seems almost impossible to imagine a market where physical demand can increase to record numbers, resulting in a supply deficit and yet the price just heads lower.
Should the price move lower then we will see further demand and supply issues affect the price. Mining costs will no doubt play a bigger role in the supply of the metal, there will be little scrap supply entering the market and yet investors are likely to continue to demand the metal. This is most likely to be seen in the US where coin demand continues to break records and in the East where it is an affordable alternative to gold.
Maybe, however, with the news that the silver fix is to be scrapped this will be the last of the reports that points towards such bizarre market mechanics.
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