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Silver May Be In Short Supply, But All Is Quiet on The Price Front

Kitco News

(Kitco News) - Are we running out of silver?

Silver production declined in 2017 by 4.1% marking the fifth year in a row that the silver market overall posted a deficit.

The results are part of the World Silver Report released Thursday by the Silver Institute which includes the GFMS team at Thomson Reuters. Silver prices, however, are still trading range-bound, below $20 an ounce, seemingly ignoring the shortage of supply, but one analyst says that prices are driven by more than what’s simply underground.

“It’s also the fact that you have a lot of above ground …l in terms of bars and coins that is available to feed the market,” said Johann Wiebe, lead metals analyst for GFMS Thomson Reuters in an interview with Kitco News. “So it doesn’t necessarily mean that a deficit will lead to higher prices.”

Silver futures climbed by more than 7% last year. The May silver futures contract SIK8, -1.66% settled at $16.473 an ounce on Comex on Thursday, up roughly 2.5% for the month so far, but down 2.7% year to date.

Wiebe added that silver’s deficit is relatively small when compared to the physical market, standing at only 3% of the market. “It’s not quite big enough to make a significant impact on the price,” he said.

While mine production dropped last year, following a string of disruptions across the Americas, overall total physical demand also eased, falling 2% on the year.

According to the report, the largest drop in demand came from the retail market, as coin and bar investments declined 27%.

Many experts have explained that cryptocurrencies were largely responsible for retail investors’ withdrawal from precious metals last year, as speculators flocked to bitcoin and other parabolically-rising digital currencies.

Balancing this was a rise in industrial demand for the same period by 4%, the highest level since 2013, supported by photovoltaic applications, a recovery in electronics, as well as the automotive industry.

China, which accounts for half of the world’s new solar installations last year, was the main contributor to growth.

Wiebe said that while the retail market is still an integral component of the silver market, accounting for 15% of all physical demand, industrial demand is likely to only pick up and will be the key driver for silver demand growth in the future.

The lackluster silver trade can been seen in its relation to gold as the gold/silver ratio hovers near a two-year high around 81 points. The historically elevated ratio has prompted some analysts to recommend a short gold, long silver trade. “I can see where they’re coming from,” Wiebe said. “Over a 50-year period, the average for us was 55, now we’re near 82, and if you look at the history, every time [it is] around 80, you see the ratio eventually coming down.”

The gold-silver ratio shows how many ounces of silver you need to pay to have one ounce of gold.

Thomson Reuters forecasts silver prices to break past $18 this year, but Wiebe noted that a further breakout to historical highs won’t be possible unless “investment sentiment [is in] such a mood that [investors] are willing to absorb significant amounts of more metal coming on to the market and pushing prices up.”

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 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.