OUTLOOK 2014: Investors Expected To Continue Absorbing Silver

By Debbie Carlson of Kitco News
Tuesday December 24, 2013 12:00 PM

(Kitco News) - Investment demand will remain a key factor for the silver market in 2014, as there will likely be little slowdown in buyers’ appetite for the metal.

Industrial demand should pick up as the global economy grows, particularly in the U.S., although how much this will affect silver is up for debate. However, continued growth in mine supply and a lackluster outlook for gold will keep silver tethered.

Most bank analysts see average silver prices rising next year, with a range of $19 to $23.

In spite of good investment demand for silver, prices were in a bear market this year, down 35% as of mid-December, earning it the dubious distinction of being the worst-performing commodity futures market for 2014. If that holds, this would be the worst performance for silver in more than 30 years, Commerzbank said.

Soft industrial demand, which accounts for half of silver’s usage, contributed to the weak silver prices, the bank said, citing research by Thomson Reuters GFMS

Low prices didn’t stop investors from keeping silver in their portfolios. The largest silver exchange-traded fund, iShares Silver Trust (SLV), as of Dec. 17 has 10,139.78 metric tons of silver, slightly more than what it had to start the year, 10,084.96 tons, and not far off the high set on Jan 16 of 10,734.99. By contrast, holdings in the largest gold ETF, the SPDR Gold Shares (GLD) are down nearly 40%.

Related Stories:

Silver-coin sales were also robust this year, with the U.S. Mint selling a record number of one-ounce American Eagle coins. The Perth Mint and the Royal Canadian Mint also said they had hefty demand for their silver coins.

Strong investor demand should continue into 2014, market watchers agreed.

“From what we see in the retail space, I would expect (coin) sales to continue at a strong level. I’m not sure if we’ll top this year’s level, but even if sales are off 10%, it’s still a strong number,” said Carlos Sanchez, director of asset management at CPM Group.

Independent silver analyst and investor David Morgan said investors will continue to buy metals because monetary policy will stay ultra loose.

Even though the Federal Reserve said that it will start to taper its $85 billion in bond purchases by $10 billion starting in January, Morgan said he doesn’t expect the program to end.

“I think the public is going to realize that we’ll never get away from monetary expansion,” Morgan said.

Silver prices fell after the news of the Fed’s tapering decision. While the news wasn’t a surprise, the timing was, market watchers said.

Sanchez said despite the weakness in silver, he believes the market is close to strong support and doesn’t see a price rout. When silver has fallen under the $19, it has been met by buying interest, and he expects more of the same in 2014. CPM Group has silver trading in a range of $18 to $25, with an average price of $21.

Morgan said he doesn’t have an average price forecast, but he said he expects that silver will return to the $30 to $34 area at some point in 2014 and recoup the earlier gains from this year. Silver’s high was $32.409, set in January. Silver may get some further investment interest if equities fall. Given the outsized gains in the stock market, it’s due for a correction and money flows will likely go to asset classes that are undervalued. That could mean silver and gold.

Jessica Fung, analyst at BMO, said the firm hasn’t published price forecasts yet, but said they expect the gold to silver ratio to hold around the current level of about 61:1 in 2014. That ratio is how many ounces of silver it takes to buy an ounce of gold. The ratio was as high as 64.2:1 at the beginning of December, UBS’ Teves said.

Sanchez said silver prices could rise into 2014 not only on the back of continued investment demand, but also on an increase in industrial usage as the global economy picks up.

Improved “economic conditions worldwide will support silver on the industrial side. I think you’ll see an uptick for all uses for the most part,” he said, citing expectations for a pickup in U.S. growth, the European Union coming out of a recession and Chinese growth stabilizing.

CPM Group forecast rises in silver used in jewelry, industry, electronics, batteries and solar panels.  Photography use is expected to hold flat after plummeting for many years.

“We’re not seeing a decline anymore because most of the switch to digital (photography) has been made,” he said.

Fung said there might be some increase in industrial demand, but she said BMO doesn’t see such a big growth area for the metal.

“There will be some growth, particularly in the U.S. because of the economic pickup. Part of the problem we see in the near term is that a lot of the end-users of silver are still going through a thrifting period where they’re still dealing with $20 silver prices and (are) not (using) as much silver in their product. We see industrial demand growing a bit, but not as strong as the economic pickup will be because of the use will be smaller. That’s why we see the price ratio as it is. The supply growth will outpace industrial growth,” she said.

Mine Supply To Grow

Both Sanchez and Fung said they see silver-mine supply continuing to build.

CPM Group forecast mine supply rising 4.8% in 2014, with increases in China, the U.S. and Russia. Only Australia is forecast to lose some mine output.

The rise in mine output in recent years has been mopped up by investment demand. Fung said investment buying will take on some of this new supply, but the question for 2014 is whether investors will buy enough to offset new supply coming online.

“That’s the issue for us,” Fung said, “the fact that mine supply is still growing next year…. Part of the problem with silver is that so much of it is by-product, so as long as the copper and the gold mines are coming on there’s not much we can do about the silver that’s coming out of the ground, either. So, in many ways, that’s why we think next year the gold to silver price ratio will be at the same levels that they are now.”

By Debbie Carlson of Kitco News; dcarlson@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.
kitco news

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y

Interactive Chart