After topping $40 (U.S.) an ounce this week for the first time since 1979, high-flying silver ran into some turbulence Tuesday as investors cooled on commodity plays. After a remarkable rally that has more than doubled silver's price in less than eight months, how much longer can the metal shine? David Parkinson gathered a panel of experts via e-mail to discuss silver's surge.
David Parkinson, The Globe and Mail: We've seen silver surge 50 per cent since late January - a time when its traditional dance partner, gold, has risen a modest 10 per cent. Why the sudden excitement in silver?
Ross Strachan, commodities economist, Capital Economics: Silver is benefiting relative to gold from improved optimism about the global economy as its industrial uses come to the fore, particularly for photovoltaic purposes [solar power cells] In addition, the investor community is being drawn to silver for a whole host of reasons, not least the industrial arguments, but also importantly (and in contrast to gold) because it is still comfortably below all-time highs. Furthermore, silver has gained increased retail investor interest, especially in North America and Germany, as small-scale purchases of gold have become increasingly prohibitive, helping silver coin sales to record levels.
John Kurgan, senior market strategist, Lind-Waldock: As a retail adviser, what I've been finding over the past year is the retail investor is feeling that gold is "expensive" and silver is a "better" precious metal value play. This is underpinned by the lack of faith in fiat currencies and the need to be in something that will hold value.
RS: I would note, however, that following the more than doubling of silver prices since last summer, the gold/silver price ratio is now substantially below the average of the last 30 years or so.
JK: Good point, Ross. But you would be surprised how many investors either don't look at that ratio or have the wrong ratio in their analysis. With respect to the doubling of the silver price, that, in some cases, has only encouraged some people to want to be involved.
Andrew Kaip, silver-mining equity analyst, BMO Nesbitt Burns: Supporting a positive outlook for silver in the near term has been some good research from GFMS [Gold Fields Mineral Services]that has published some very bullish demand prospects for silver. This coming from an organization that is traditionally very conservative.
As for near-term trading, silver has run so strongly since the January correction that I am not surprised we are seeing a sell-off in sympathy with other commodities.
JK: We are down $7 in crude oil in the last two days. Metals and specifically silver will continue to come off in sympathy, or at the very least have trouble rallying.
RS: Given the speed and scale of the upward price move in silver, and oil for that matter, the current brief pullback is hardly surprising, as some investors were bound to be looking to take profits. More importantly will be if this leads to widespread change in sentiment toward commodities, possibly generated by substantial fund liquidation, or - more likely in my view - that this is a short-term correction.
JK: One of the technical indicators that I look at is Market Vane's bullish consensus number, which is at the very frothy level of 95 per cent. Typically when we are greater than 80 per cent, a correction is very possible. The extent of the correction is another matter. As of late, any correction has been a great buying opportunity, and perhaps this is the case again.
AK: I agree that we are seeing profit-taking. Most institutional clients I am in contact with are of this opinion. When we look at silver valuations, they are lofty and gold companies are looking more attractive.
DP: Let's talk a bit more about demand for silver. Where is it coming from? After all, this is an industrial metal that has seen the photographic industry all but disappear, and the auto industry shrink considerably. Isn't that permanently reducing its industrial demand?
RS: Silver demand can be broadly characterized in five ways. These are industrial, investment, jewellery, silverware and photographic.
Industrial demand is the most substantial and has rebounded over the past 18 months, underpinned by the recovery in the global economy. However, there are also a number of other factors that are leading to silver industrial demand increasing faster than the wider economy. In particular, the use of silver in the photovoltaic sector is expanding dramatically. In addition, there is a rising trend of silver use for electrical and electronic applications in cars.
These factors are now far more significant than the continued long-term decline of silver for photographic and silverware uses.
DP: What's the outlook on the supply side? Will production keep pace with demand?
AK: Our research suggests that we are going to see significant growth in mine production over the next five years. Silver demand should outstrip supply through 2012. However, beginning in 2013 we expect a wall of new mine production to develop.
RS: Mine production has been rising on a global level for many years, and I agree with Andrew's comment that there will be a substantial increase in silver mine supply over the next five years.
AK: Mine production was up 2.5 per cent last year. If this is the kind of year-over-year production increase we should expect in the future, then the future is bright. However, if we look at all the projects that are in the development pipeline, growth projections are more like 6 per cent per annum for the next two years, followed by double-digit growth between 2013 and 2015.
Take this into account and both industrial and investment demand are going to have to remain strong to consume this new supply.
If the market perceives that this new supply is going to saturate the market, investment demand could suffer and the trend may reverse, placing downward pressure on the price.
I don't have a crystal ball to predict the outcome, but this is not something that is being considered in the current enthusiasm for silver.