Silver prices should be underpinned by improving industrial demand in 2014, but they will tumble on gold’s coattails if the U.S. Federal Reserve begins tapering its stimulus, a top analyst at metals consultant Thomson Reuters GFMS said on Tuesday.
Strong investment demand in silver coins and exchange-traded funds, and Indian consumers’ substitution to silver from gold should provide support, said Andrew Leyland, manager of precious metal demand at Thomson Reuters GFMS.
Gold’s record two-day $225 per ounce drop in April and a similar $5 slide in silver have unleashed years of pent-up physical demand for coins and bars among retail investors who had been waiting for a bargain entry price point, particularly in the lower-priced silver.
“Silver demand has seen an increase because of its price correction. We have seen more uptake in silver, and people are certainly more bullish than a couple of years back on the industrial side,” Leyland told Reuters ahead of the release of GFMS interim market review at the Silver Institute’s annual dinner on Tuesday.
The U.S. Mint’s 2013 American Eagle silver bullion coin sales on Tuesday rose to an record high, highlighting retail investors’ strong appetite for silver physical products.
For 2013, the GFMS report expects a 4 percent growth in fabrication demand, which consists of its use in industrial applications, jewelry, silverware, coins and medals, and photography.
Silver’s industrial demand, which represents about half of its annual global demand, is expected to rise 1 percent this year.
Silver jewelry and silverware demand should each rise 6 percent this year, supported by an increase in silver imports by India, Leyland said.
India, traditionally the world’s largest bullion consumer, has hiked its gold import taxes and unveiled a flurry of regulations earlier this year in an attempt to reduce its current account deficit and to lift the rupee from record lows.
Looking forward, Leyland said that he now expects silver to average $24.24 an ounce in 2013, and $20.42 for 2014.
On Tuesday, silver fell 3 percent to $20.70. Year-to-date, it was down 32 percent, underperforming gold’s 24 percent drop.
The silver market has been one of the most volatile and speculative among commodities.
On April 28, 2011, silver sky-rocketed to a record high near $50 an ounce, but that was followed by a 30 percent correction to $35 in just two weeks time, triggering the so-called “commodities flash crash.”
Lingering fears about the Federal Reserve cutting its stimulus will likely more than offset any support from better industrial demand for silver, Leyland said.
“One of the defining characteristics of the silver market is its display of duality, at times closely shadowing developments in the gold market and at others, taking cues more from the industrial world,” the GFMS report said.
“This trend is forecast to continue into 2014, as an improving physical demand environment is faced with the potential for an unwinding of U.S government quantitative easing and a stronger U.S. dollar,” it said.
(Reporting by Frank Tang; Editing by Marguerita Choy)