Silver is likely to trade in a range between $17.75 and $22.75  for the rest of 2014 as the global silver surplus widens to around 156moz this year, says HSBC.

According to the group’s latest silver outlook publication, there are three main trends that are likely to drive the silver market in 2014:

  • Supply remaining strong,
  • Investment demand making a modest recovery
  • The current pickup in demand from industry and jewellery.

Looking at the supply side first, the bank says that at near $20/oz, prices are within striking distance of the highest-cost marginal producers. But, despite this, it says, silver remains worth extracting.

Adding, “A break below USD20/oz, however, would not necessarily result in automatic production cuts. We see no price-related threat to output as long as silver remains above USD15/oz. And, even in the event of another plunge, prices would have to remain below USD15/oz for a considerable period before we were to see price-related reductions in output schedules, we believe.”

According to HSBC, mine output continues to rise, partly as a result of investments made earlier in the mining cycle, especially from base metals projects where silver is produced as a by-product.

“We expect mine supply to grow for this year and in 2015, but at a more moderate pace from the robust levels of the past couple of years. Other sources of silver supply, notably scrap, should increase in 2014, based not so much on prices – which are not high enough to encourage additional recycling – but more due to electronic recycling and more stringent environment regulations globally. Hedging is likely to contribute little to supply and government silver sales should stay at low levels.”

A look at the two demand side drivers points to investment demand both on the comex and in the ETF space continuing to have an important role to play in 2014.

“Silver ETFs have remained remarkably solid despite price falls and heavy liquidation in the gold ETFs. We look for modest increases in ETF demand this year, but the rate of increase will be well below historical averages.”

There are four sources of demand growth that we believe will help support prices on any downswing: industrial demand, coin and bar purchases, increasing jewelry demand, and greater demand from China. Greater industrial silver consumption is a key component in our analysis for steady prices this year. HSBC economic forecasts, along with the wide-ranging uses for silver, including traditional heavy industries and emerging technologies, imply strong industrial demand for silver this year. Coin and bar demand is positive and jewelry demand is gaining market share.

Indian demand may weaken from record high levels if gold import tariffs are lowered.

Investment demand is making a modest recovery. Net long positions on the Comex are rebuilding after steep declines in 2013. Silver ETFs have remained remarkably solid despite price falls and heavy liquidation in the gold ETFs. We look for modest increases in ETF demand this year, but the rate of increase will be well below historical averages.

On the Comex, HSBC says net long positions continue to recover from 2013’s steep fall. But, it says further increases may be hard to achieve.

“Gross short positions are modest, reducing the possibility of a sharp short-covering rally. Meanwhile net long positions are close to their five-year average of 190moz, reducing the likelihood of heavy liquidation. Without new bullish developments unfolding, it is hard to argue that net long positions will increase substantially. This may limit silver’s upside.”

But it is not just investor demand that is growing. And, HSBC believes, it is these sources of demand growth should help support prices in a downswing.

These four sources, industry, coin and bar purchases, jewellery and China should help set the floor for prices.

“HSBC economic forecasts, along with the wide-ranging uses for silver, including traditional heavy industries and emerging technologies, imply strong industrial demand for silver this year. Coin and bar demand is positive and jewellery demand is gaining market share,” it says.

On bars and coins specifically, demand may face two major headwinds this year, HSBC believes: USD strength and growing disinflationary trends worldwide.

“This notwithstanding, we expect good coin demand plus moderately strong small bar demand will help stabilize prices,” it says.

Industrial demand for silver is also more likely to be influenced by the business cycle than the underlying silver price, the bank says.

“HSBC economic research forecasts global industrial output will grow 4.2% this year; a solid increase from sluggish growth in 2013 of 2.3%. Importantly for silver, growth in the emerging markets is forecast at a robust 5.7% for this year up from 4.0% in 2013.”