Silver Bullish Despite Negative Manufacturing

Fear and uncertainty weighed heavily on the markets Friday as investors who viewed almost everything as too risky embarked on a sell-off. Despite the overall negative sentiment and the release of a slew of weak manufacturing data, silver had a bullish day, closing up nearly $1.00 at $28.68 on the New York spot market. Can investors expect gains for silver to be sustained amid a slowdown in manufacturing?

Of late, silver has been trading with industrial commodities. As a result, the metal has been susceptible to concerns about global economic conditions and prices have been in a downtrend. However, on Friday investors ignored reports that suggest the world’s factories are slowing down.

“The rate of expansion in global manufacturing production slowed sharply in May, as growth of total order books remained lackluster and international trade volumes posted a marginal decline,” said David Hensley, director of global economics coordination at JP Morgan.

Hensley’s comments were in response to the release of the JPMorgan Global Manufacturing PMI, which shows that the global Purchasing Managers’ Index (PMI) for May fell to 50.6 from 51.4 in April, the lowest reading in five months.

As the reading is above 50, the survey suggests that on a global basis manufacturing continued to see expansion in May. However, on an individual basis, the statistics show that many nations’ manufacturing sectors contracted last month. These include Germany, France, Italy, Spain, and the Netherlands. PMIs in the EU and UK fell to three-year lows.

Two reports released Friday also indicate manufacturing declines in China.

Data from the National Bureau of Statistics and the China Federation of Logistics and Purchasing show that the PMI fell from 53.3 in April to 50.4 in May, ending five months of growth, but still within expansion territory.

HSBC’s PMI indicates a seventh consecutive monthly decline in Chinese manufacturing, with the PMI falling to 48.4 in May from 49.3 in April, suggesting contraction.

“May’s final reading confirmed that manufacturing growth slowed further on weakening demand from both global and domestic markets,” said Hongbin Qu, chief economist and co-head of Asian economic research at HSBC.

Manufacturing in context

“Industry and manufacturing are definitely the single most important demand source for silver,” said James Steel, chief commodities analyst for HSBC. “But one bit of data can paint an imbalanced picture.”

When considering the impact of manufacturing on silver, Steel said it is important to focus on electronics. Since the metal is an excellent and relatively cheap electrical conductor it is used in a wide range of related applications; in many of these applications silver has no substitute.

Steel had not had the opportunity to break the electronics figures out of the latest reports as of Monday morning, but he said the sector has been holding up well.

The Consumer Electronics Association’s (CEA) Index of Consumer Expectations for May declined for the fourth month in a row. This index measures sentiment about the economy, and the drop was reportedly driven by expectations of declines in personal financial health.

However, even with that negative outlook, the CEA’s Index of Consumer Technology Expectations increased roughly 4.5 percent, with consumers showing an inclination to increase the amount they were willing to spend on technology as well as a higher propensity to buy tech.

The auto industry is another important sector for silver demand as the metal is relied upon for the electronic components in vehicles.

While much of Europe’s auto market has been in decline, Germany has managed to buck the trend and post growth over the first four months of 2012. The UK has followed suit.

A slowdown has been seen in the Chinese auto market in 2012 to the tune of an overall drop of 1.3 percent in sales during the first four months compared to last year. But in April both commercial and passenger sales rose. Passenger vehicle sales were up about 5.2 percent in April compared to the same period in 2011.

Steel says US sales have been good, and he expects that trend to continue.

“Even if the economy stagnates, demand is likely to remain strong in the US because many consumers have delayed replacing their vehicles. Now it is necessary and for many it cannot be prolonged,” he said.

Based on electronics and auto demand, Steel believes that the outlook for silver is moderately good.

Even if these sectors were to see short periods of weakness, Steel does not foresee imminent doom for the silver market.

Circumstances that could be quite negative for the market, however, are “weak demand from both China and the US,” or “a sustained decline in electronics for two quarters without corresponding investment demand.”

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any company mentioned in this article.