The Price of Silver in 2016

This week, Thomson Reuters GFMS released its annual World Silver Survey, an extensive report on the price of silver and the silver market completed annually on behalf of the Silver Institute.
The report covers a number of supply and demand factors driving the price of silver, including specific sector and country overviews. This year, Thomson Reuters sees the price of silver averaging at $15.90 per ounce by year-end. The price of silver is expected to move higher in 2017, to $17.50 per ounce.
To get a bit more insight into the results of this year’s silver survey, the Investing News Network spoke with Erica Rannestad, senior precious metals analyst at Thomson Reuters. Overall, while the price of silver isn’t expected to take off in 2016, there are some signs that things could be looking up for the white metal.

Factors driving the price of silver last year

Thomson Reuters reported that the silver market ended 2015 in an annual physical deficit for the third-year running. On top of that, this year’s deficit of 129.8 million ounces was 60 percent larger than last year’s deficit—and also the third largest deficit on record.
So why isn’t the price of silver higher? When is silver going up? Beyond broader weak sentiment in the metals space, there are a few reasons for last year’s weakness in the price of silver, according to Rannestad:

• Coin and bar demand; Rannestad stated that the deficit was driven by higher silver coin and bar demand, which in turn was driven by record low prices themselves. “Coin and bar demand is much more price sensitive in most years,” she said. “For example, if [investors] have got $1,000 to spend every year on silver, they get to buy more ounces in a lower priced environment than they would in a higher priced environment. So that’s why there’s such a large deficit.”

• Risk of selloff at higher prices; Furthermore, all of that coin and bar ownership creates a bit of a risk factor. “If you saw prices increase, at certain levels you might see some of those investors sell into those prices, and that could really flush the market with a lot of supply,” she said.

• Silver shorts; The spot price of silver dropped 14 percent in 2015, so it isn’t surprising that some investors chose to go short on silver. “The surface deficit captures that source of investment for bars but it doesn’t capture what’s going on in terms of influencing price in the futures and options market,” she said. “But the futures and options market does influence the price, and because the view on silver price was negative in the short term, you saw a lot of investors in that market go short. So it did weigh on the price a bit.”

• Higher silver production; “Despite low prices mine productions continue to move higher and that didn’t really help the market,” Rannestad said. Global mine production growth slowed to 2 percent last year, but still set a record annual total of 886.7 million ounces. “We are expecting mine production to decline going forward, starting in 2016, and that is coming from years of cuts as well as more recent cuts in mine production,” she added.

Is silver bouncing back?

As many silver bugs are no doubt aware, the price of silver has been on the rise for the first four months of 2016, rising 22.87 percent to reach $17.41 per ounce since the start of January.
Rannestad mentioned a few points that she sees driving that price increase:

• Save haven demand; “I think the single key factor has been a renewed interest, or a reemergence of interest, in safe haven assets, and that’s just been a more macro driver in terms of investors worrying about negative interest rates, currency devaluation, volatility in the market and slowing economic growth,” Rannestad said. “Post financial crisis a lot of global growth was coming from developing economies … and going forward that’s not really the case. I think the concern is where global growth is going to come from.”

• Stronger fundamentals; Rannestad also expects supply/demand fundamentals to be more supportive of the silver price in coming years. As mentioned above, she sees the emergence of a longer term decline in mined silver production. And while industrial silver demand has been declining in recent years, she sees a potential increase going forward.

• US monetary policy; “I think investors are also going to look at what goes on in terms of monetary policy in the US,” she stated. To be sure, the US Federal Reserve still hasn’t raised rates as of its latest meeting in April, which has been supportive of both gold and silver prices.

Finally, it’s worth noting that while Thomson Reuters’s current 2016 forecast of $15.90 for the price of silver might seem low relative to current spot prices, the firm does see a positive outlook for silver in 2016.
“To give you some perspective, we also forecast on a quarterly average basis, and the average for the fourth quarter is $16.80. So overall, we expect an upward trend for silver prices over the course of this year.”

What do current silver price trends mean for silver mining companies?

Certainly, silver mining companies stand to benefit from a higher price of silver, and that could be a boon for investors looking to gain leverage to the silver price via silver equities. As a final point, here are a few points to keep in mind when looking at silver mining companies:

• Currency depreciation; “Devaluations or depreciations of currencies last year actually benefited cost in several silver producing countries,” she stated. “If [investors] can form a view on currency expectations, looking at the country that depreciates the most might actually be a good play for an equity investor, because it’s going to benefit cost. And then if you combine that with a relatively higher price, there’s a little bit more margin there.”

• Higher revenue; “I think higher price obviously will benefit revenue [for mining companies], and it depends on what we see in the commodity cycle overall,” Rannestad said. “The oil prices are covered quite a bit, and if it remains steady at current levels, that would be good from a cost perspective.”

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