How long will this silver spike last?

By Rosalyn Retkwa


Silver is spiking upwards. Its price, as reported by the London Bullion Market Association’s daily fix, has jumped 21.5% from $27.64 a troy ounce on August 15 to $33.60 on September 10.


But there’s a question as to how long this price surge will last since what’s moving the market is not the fundamentals of supply and demand, but expectations about monetary policy and currency swings.   


Since an estimated 55% of the market for silver is industrial users, normally, industrial demand is the main driver of silver prices, but that’s not the case this time. Rather, “it is the threat of further monetary debasement that is lifting gold and silver prices higher at the moment,” says Martin Arnold, the head of research at ETF Securities (UK) Limited in London. The Federal Reserve’s Federal Open Market Committee is expected to announce more economic stimulus in the form of more quantitative easing (QE) at its next meeting on September 12 and 13, and basically, cheaper money makes for higher prices in silver and gold. “It appears that QE is on the way, and investors are moving into position for this scenario,” he says.


“Expectations of central policy easing in the U.S. and Europe have been particularly beneficial to the precious metals complex over the past week and month, with gold and silver breaking through significant technical resistance,” Morgan Stanley said on September 10 in its weekly research report called “The Commodity Manual.”  The firm also said, “We expect further gains in gold and silver in the short term.”


Longer-term, the fundamentals tell a different story. Silver is already in surplus, and that surplus is expected to grow. Silver is a huge, world-wide market, and the estimates are slightly different, but they all point in the same direction, toward growing stocks of silver, and eventually, lower prices.


Ronit Savant, the senior commodity analyst at the CPM Group of New York City, estimates that total production this year will grow to 729 million ounces, up from 713 million ounces in 2011, for a 16 million ounce increase in 2012. In the context of such a huge market, that might seem like a small number, but “it’s an ongoing increase in an extremely high number,” he says, noting that new mines are coming online all over the world, including three in China, two in Mexico, and one in the U.S., as well as in other locations.


Analyst James Steel of HSBC Securities (USA) of New York City, notes that it’s not just growing mine output that’s boosting supply, but also “increased recycling, some of which is mandated by law.” In his most recent forecast, published in July, he said his model indicated that the surplus would narrow slightly in 2012, to 155 million ounces from 172 million ounces in 2011, but that the surplus would once again widen to 175 million ounces in 2013.


Back in July, Steel predicted that silver might rally towards the end of 2012 and “hit” $33 an ounce because of investor demand for “hard assets amid a climate of economic uncertainty,” but he also said he felt it was “unlikely” silver would “stay over $32 an ounce for a sustained period.” His 2013 estimate is $32 an ounce, followed by a drop to $28 an ounce in 2014, and his five-year estimate is even lower, at $25 an ounce.


Savant is more bearish. He thinks it’s possible that silver could “fall all the way back to around $21, $22 an ounce in 2013.”  But he notes that what’s important is the trend. “The trend is declining, and that’s positive for industrial buyers,” he says. 


Meanwhile, industrial users of silver will want to keep an eye out for two major reports that are about to be released by the Silver Institute, an international industry association based in Washington, D.C. The reports will be freely available via its Web site:


The first is an update to its 2011 report, “The Future of Silver Industrial Demand,” which will be prepared by Thomson Reuters GFMS and scheduled for release in September. That report will include a year-to-date review and a short-term outlook, and will also look at the demand for silver in specific consumer segments such as automobiles and photovoltaic cells.


And, in October, the Silver Institute expects to release a second Thomson Reuters GFMS study on China as a growing source of both supply and demand.  In 2011, China was the world’s second largest consumer of silver, accounting for 16% of demand, and also the world’s third largest producer, accounting for 14% of the world’s supply, the Institute noted.

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