Silver being left behind in latest gold price surge – but don’t despair!
Silver was left behind as gold surged following the FOMC minutes release. But despite some adverse analytical comment the overall picture may be rather more positive.
Posted: Thursday , 10 Apr 2014
LONDON (Mineweb) -
Silver investors will have been a little disappointed by the metal’s performance vis-a-vis the gold price following the latter’s gains after the release of the latest U.S. FOMC meeting minutes. The minutes suggested that the low interest rate regime may well continue longer than expected and resulted in a major boost to the stock market and a significant uptick in the gold price. But it had rather less impact on silver which initially remained stuck below the $20 mark, although this morning’s trade has at last see it move up above this mark. Perhaps European investors are less pessimistic about silver’s investment credentials.
Now silver usually moves with gold, but in a more exaggerated manner so the silver investors could have been forgiven for expecting that the near 2% rise in the gold price since Tuesday would be accompanied by an even greater rise in silver in percentage terms. This may yet happen should the gold price continue its latest mini-surge, but silver has been more volatile and indeed the price actually fell back sharply on some adverse comment in the U.S. before recovering quite well in this morning’s trade… But over the same 3 day period that gold rose the 2% mentioned above the silver price was, in effect, flat following a very sharp temporary dip yesterday.
So why is silver behaving in this manner. Perhaps the short answer is China. Silver in reality should perhaps trade as an industrial commodity rather than as an investment grade precious metal – at least that is what most of the bank analyst pundits would say. And China, which is such an important consumer of all industrial metals appears to be experiencing something of a downturn at the moment – or again perhaps that should be restated as a smaller upturn than seen in recent years. After all any Western industrialised economy would give their eye teeth for a growth rate of over 7% which is still projected for China. True this is well below the double digit growth figures being credited to the Asian dragon only a couple of years back – but it is growth nonetheless and analysts often seem to lose sight of the fact that the Chinese economy is still advancing at even this kind of rate.
Now the major bank analysts will tell you that silver should be trading in a similar market pattern to copper – the benchmark industrial metal. But they also seem to lose sight of the fact that the production scenarios for silver and copper are very different. Copper – so GFMS tells us – is heading into a significant surplus this year and prices may well weaken further accordingly – See: Copper market set for moderate surpluses as mine supply ramps up – GFMS. However silver is primarily mined as a byproduct from gold mining (where production is likely to be flat) and even more importantly from lead and zinc mining where most projections see production falls over the next couple of years as some major mines come to the ends of their lives with few, if any, similar sized projects due to start up. It’s a very different scenario! There are actually very few primary silver mining operations – and in truth some of these should be really considered as base metal mines with strong silver values.
And industrial usage growth in silver – particularly in electronics and as a biocide - is growing fast. It is true that photographic usage has declined hugely over the past decade or so as traditional photographic demand has been replaced by digital technologies. But it is also conveniently forgotten by the silver bears that recycling from the photographic sector was a very significant source of silver supply while that from the new usages is at a very much lower level. And perhaps the photographic demand has now fallen to a sustainable level – silver is still heavily used in some important specialist areas of photography – like x-rays for example.
So despite comments from analysts who we think should know better, like the perma bears at Natixis – See: $10/oz silver in 2015 among Natixis scenarios we are not convinced that any shortfall in industrial demand is actually likely to be seen. Indeed we suspect that industrial growth in silver usage will continue while mine production may actually begin to decline along with the likely fall in lead and zinc output.
This brings us back to gold and silver’s general tendency to move in line with the yellow metal’s price but faster – in both directions. Should gold continue its upwards progress this year it is certainly on the cards that silver will resume this kind of relationship with its sibling. Currently the Gold:Silver ratio is around 65 – as against an oft quoted historical ratio of 16. Now while we don’t think the 16 level is likely to be achieved again as silver can no longer be seriously considered as a monetary metal as it used to be when this ratio was prevalent, it is definitely possible the ratio level will drop, and it could drop sharply below its current level. There remains huge investor interest in silver and coupled with what we see as a likely growth in industrial usage, along with a possible drop in mine supply over the next couple of years, the prospects for it to perform better than gold remain strong. However it should be borne in mind too that silver is a very small market in the overall scheme of things and thus perhaps more subject to potential market manipulation than for any other major traded metal we know as it does not take a lot of money to move the market up or down. This will continue to make investment in silver probably more risky than in gold – it’s not known amongst traders as the Devil’s metal for nothing. But overall the portents do not look to this writer nearly as gloomy as some would have you believe.