Q2 is over and done with, but the trends and key events it brought with it are still impacting the market.
According to Andrew Chanin, co-founder of the PureFunds ISE Junior Silver ETF (ARCA:SILJ), those trends include the continued positive performance of silver miners and a stagnant silver price, while the quarter’s key event was the news that the London Silver Fix would be replaced in August.
To get a better understanding of how those factors affected — and continue to affect — the silver market, Silver Investing News (SIN) sat down to chat with Chanin. Here’s what he had to say.
Miners outperform metal
SIN last spoke with Chanin not long after the end of Q1, at which time he commented that “Q1 showed a very strong reversal in mining stocks from the trend we saw last year,” when precious metals “were one of the most punished sectors.”
When asked if mining stocks continued to perform well in 2014′s second quarter, Chanin said that though “we started to see a little bit of a sell off again” in March, “as we approached June, we began to see that the miners had started leading the way again and the metals started following them.”
It might seem odd that silver miners are performing better than silver itself, but according to Chanin “it’s not that uncommon.” Indeed, he said, “we’ve seen this several times already this year, as well as many times historically.” This time, he believes that renewed interest in silver stocks “was probably due to political tension” in addition to “the announcement that the silver fix was going to cease to exist in its current form.”
Speaking of the silver fix…
As mentioned, Chanin pegged the news of the silver fix’s replacement as a key Q2 event, noting that “initially there were three camps” of ideas about what it would mean for the market — namely: those who thought the replacement would increase transparency, those who believed it would bring “different faces” to “the same game” and those who hoped “the actual producers of silver would try to create their own mechanism.” The third possibility was “a long shot,” Chanin admitted, but “one [he] thought could absolutely be game changing for the market.”
Of course, market watchers now know that it’s the second camp that ended up being correct. A decision regarding the fix’s replacement was made in Q3, and last week it began operating. That said, Chanin believes it’s still “too early to tell what changes will happen.”
What about prices?
While it’s great that silver miners are performing well and that the new incarnation of the silver fix is up and running, it’s impossible to gloss over the fact that silver itself isn’t doing its best. Indeed, the white metal has been stagnating around $20 per ounce seemingly forever, frustrating investors who would like to see it make a definitive move either up or down.
Some investors have turned to seasonal price trends for solace — for instance, the fact that June tends to be silver’s weakest month, while August often brings higher prices for the metal. However, while Chanin said “these seasonal events certainly are important,” he cautioned that “after such events occur, “it doesn’t take much to undo a price direction.”
So when can investors expect silver to make an upward move? Chanin didn’t say much about whether such a move is likely in the short term, simply noting, “it’s kind of wait-and-see mode,” but he did reiterate his view, expressed in previous interviews, that silver’s long-term outlook is very positive. “We’ve seen significant consolidation over the past two years; it seems that whenever silver dips below $20 there’s a lot of buyers,” he said. “I think that a lot of people are starting to realize that silver below this level just doesn’t seem sustainable.”
Touching briefly on factors that may push silver prices up in the long-term, Chanin highlighted three potential catalysts:
- Solar: “I think that solar is going to be the main driver [of silver] going forward,” Chanin said, explaining, “one reason I’m so excited about solar is that the technology” has reached the point where it uses “the least amount of silver to get the maximum output.” That means the sector is unlikely to reduce its dependence on silver unless it decides to look for an outright substitute.
- Less scrap: Largely due to such increased efficiency, “very little scrap is coming onto the market” as it’s “uneconomical to look for scrap” in some components that previously were good sources.
- Fewer operating mines: Finally, Chanin said that even though demand for silver is on the rise, many companies “are either taking their mines out of production, or putting them on care and maintenance” as low silver prices are making them uneconomic. Exploration is seeing cutbacks as well. Those circumstances will likely creates problems down the road given that “it can take many years, if not a decade, to bring a new discovery to the market.”
Assuming silver demand does eventually outpace supply, Chanin sees even more factors perhaps pushing prices up even further. Those include:
- Industrial demand: “I’m of the belief that eventually, I don’t know when, [silver] demand will significantly outstrip supply,” said Chanin. In that type of scenario, he noted, “all of a sudden you could start seeing industrial users of silver start being huge buyers to avoid a supply hiccup.”
- Central banks buying: In the case of a silver shortage, “some banks or countries may look to either back their currency [with silver] or add [it] to their reserves,” Chanin posited, adding, “something like that would be a complete game changer because for the last several decades, central banks, if they had silver, were selling it.” Further emphasizing the significance of such an event, he noted, “when you’re talking about the buying power of a central bank or a sovereign wealth fund … you could really change the dynamic for silver moving forward.”
Those are all compelling reasons to be bullish on silver in the long term, but Chanin is well aware that waiting can be difficult. In closing, he offered these words of encouragement: “I’m a strong believer in the long-term trend for silver. So although the price has gone down … the fundamentals, in my opinion, have never looked stronger than they currently do now.”
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.