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CPM Group: Silver To Consolidate Through 2016 But Eventually Hit Record High

By Allen Sykora Kitco News
Thursday October 17, 2013 12:00 PM

(Kitco News) - Silver prices could continue to consolidate for another three years before a revival in investor interest and pick-up in industrial demand result in a resumption of a secular bull trend, eventually carrying prices to record nominal highs, CPM Group said Thursday.

The outlook is included in the New York-based consultancy’s 208-page Silver Long-Term Outlook 2013 study, which projects supply, demand and price trends for the next decade. Similar reports on gold and platinum group metals are scheduled to be released by year-end.

After rising at a compounded annual average rate of 23.2% between 2002 and 2011, silver prices have declined since 2011. In 2012, prices fell 11.7% to average $31.17 an ounce. Through September, prices this year averaged 20% less than in the same period of 2012.

This declining trend is expected to persist in the medium term, with prices consolidating through 2016, CPM Group said in the study.

Still, the consultancy looks for silver to be supported at an average annual price no lower than $18 an ounce prior to 2016, said Erica Rannestad, commodities analyst with CPM Group and lead author on the report, in an interview with Kitco News.

“After a couple of years of price consolidation, we do expect investors to come back into the market with renewed interest,” she said. “That is influenced in part by an (expected) acceleration of economic growth in the last half of the next 10 years. We do expect the economy to grow at a little bit quicker of a pace…and that will boost industrial demand, which will be positive for silver.”

Prices ultimately could hit a fresh nominal record high in the latter half of the study period, she said.

Price Consolidation Anticipated Through 2016

Some medium-term weakness and consolidation is expected first, however, with expectations that industrial demand will remain subdued for a while yet, Rannestad said. One of the factors contributing to this, she added, is the shift from computers to tablets, which requires less silver for each item manufactured.

“You also have economic weakness, which is weighing on growth,” she explained.

There is also an expectation by the consultancy for a reduction in fresh investor interest for the next few years.

Already, investors have backed away from the silver market so far this year, CPM Group said. Fresh investment demand for the metal is expected to decline by almost half from the 170.3 million ounces accumulated by investors in 2012.

Last year, investors added more silver to their inventories than in any year since 1980.

“Much of this accumulation was bargain hunting, as a large share of investors believed silver prices would head back toward their 2011 highs in the short term,” CPM Group said. “When silver prices continued to fall in 2013, a growing number of investors began to reassess and adjust their posture toward the silver market. Many investors sold off large portions of their bullion bar inventories. Still, some investors continue to believe that prices around current levels were bargain opportunities.”

But even if industrial demand falls off, other sources of demand are expected to support prices over the next 10 years. During this consolidation phase, the consultancy expects demand for coins from retail investors and jewelry from consumers to offer support, Rannestad explained. Additionally, a broader, more diverse investor base will cushion prices to an extent, as different investors come into the market as bargain hunters. “The more diverse the source of demand is, the more positive it is for price stability in the market,” she said.

And after 2016, she continued, the consultancy looks for investor demand to rise for the remainder of the 10-year period covered by the study.

“That’s what’s going to drive prices to fresh, record nominal highs during the period,” she added.

One form of investor demand – coins – is expected to hold up even during times of price declines, Rannestad said.

“Because of its investor base, which is mostly retail, the trend in that source of demand is different from other sources of investment demand,” she explained. “In years when you might see prices declining…you might see very strong coin demand due to bargain buying. We expect coin demand to be a source of price support.”

Rise In Silver Supplies Expected To Slow

CPM Group looks for the rise in silver supplies to abate in the coming years, which should offer support to prices as well.

The consultancy looks for secondary, or recycled, silver supply to decline through roughly 2016, Rannestad said. “That is very price sensitive, so it follows that price trend we expect,” she said.

Additionally, growth in mine supply is expected to be slower over the next five years compared to its historical rate.

“We see a reduction in our expectations for mine supply growth because of the difficulties in obtaining project financing,” Rannestad said. This means less funding for companies’ pipeline projects, thereby extending the timeline for bringing them on line.

Meanwhile, CPM Group looks for jewelry and silverware demand to pick up in the next few years, even as industrial demand growth slows.

“Jewelry demand will benefit from lower prices,” Rannestad said. “Then the acceleration of economic growth will boost industrial demand, which will keep the growth rate (for overall fabrication demand) high in the last half of the period, although jewelry demand would be expected to come off a little bit.”

The full report can be obtained through the “our products” tab at the CPM Group Web site at http://www.cpmgroup.com.

By Allen Sykora of Kitco News asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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