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Silver’s impressive rally over the last five weeks is no doubt a reflection of investor demand for safe haven assets in times of political and economic uncertainty. Many analysts are still bullish in the medium to long-term, but advise investors to stay cautious in the short-term and heed silver’s seasonal cycle, warning of an upcoming pullback in precious metals prices.
By Melissa Pistilli—Exclusive to Silver Investing News
Much of the run-up in investment demand for silver and gold over the past few years has been predicated upon the threat of rising inflation on the back of currency debasement.
While many a gold newsletter writer is still haranguing about the continuance of free money being dumped into the system by Helicopter Ben and the looming inflation crisis, some analysts are not convinced.
This latest rally in gold and silver prices is much more a function of speculative safe haven demand than any perceived threat of inflation. “I don’t think this is the Bernanke market,” said Robert Lenzer, writing last week in his StreetTalk blog on Forbes, “as he made it clear today that inflation is just the 2% he wants, and that’s despite the horrific run-up in food prices. And he’s beaten off deflation with QE2. No knee-jerk connection between Bernanke and precious metals. The connection for gold and silver is geo-political.”
And there are serious indications that the Federal Reserve will be ending the QE2 program early this summer, without any need for a third round.
Another threat to the “inflation thesis,” says The Steet’s Alix Steel, “is if central banks around the world decide to raise key interest rates.” The People’s Bank of China once again raised its rates recently, for the third time since October; and the European Central Bank has signaled it may do the same next month.
A major driver in the silver price over the last few years, exploding investment demand has succeeded in large part due to the creation of physically backed silver ETFs, which provided an easy way to invest for those previously denied access to the silver market.
The more investors take ETF positions, the more physical silver is taken off the open market, leading to higher and higher prices and increased demand. If the rumors about Chinese buyers planning to take delivery of SLV shares prove true, silver prices will surge even higher.
Analysts calling for $100 silver are surely making silver bugs salivate; however, let’s not forget basic economic principles. Despite the exponential growth in investment demand over the past five years, silver is still very much an industrial metal. Higher silver prices are obviously welcomed by silver investors, but no so much by the industrial sector that has to pay those high prices on materials needed for production. According to some insiders, end-users are already becoming frustrated with rising silver prices. The concern is that if prices continue to rise, end-users will look to more economical substitutes for the white metal. Such a move would lead to decreased industrial demand for silver long before prices could reach the three figure level.
Nonetheless, 2011 forecasts for industrial demand are strong with growth from electronic gadgets such as iPads, the renewable energy sector (e.g. solar panels) and the medical field. But, don’t expect demand to be on par with the significant levels seen in 2010. “This year, this type of news will not be quite as unequivocally good,” said GFMS’ Philip Klapwijk. “We’ve had such a significant rebound in industrial demand for silver that gains will be somewhat harder to come by this year compared to 2010.”
What about that supply deficit?
The proposition of a possible near-term silver supply deficit is hard to swallow for some who point out that the market has been in a surplus for years on rising output as a secondary metal from gold and base metal operations, and industrial demand from traditional sources such as photography has been slipping for years as well.
But the signs of an actual supply deficit in the physical silver bullion market are piling up, including the recent backwardation in silver futures prices on the COMEX. Other points of proof include the US Mint’s temporary discontinuation of US Silver Eagle production due to a lack of “sufficient inventories of silver bullion blanks,” and Sprott Asset Management’s announcement that it has encountered problems sourcing 1,000 ounce silver bullion bars in large volumes for its silver fund.
But skeptics remain. “In the silver market, there is enough silver, it is more to do with a short-term squeeze,” said Standard Bank analyst Walter de Wet.
Last month, the CPM Group dismissed the idea of a deficit in total above-ground supply, laying the blame on the recent tightness in the physical market on spot shortages of particular high-grade bars.
“There are rumors of shortages of physical silver circulating in the market. There are some spot shortages, but they appear limited to higher purity metal in specific forms and locations,” CPM analysts said in a report, specifically referring to the supply of 1,000 oz bars of 0.9999% and 0.99999% high-purity. There is a shortage of these bars because the majority of manufacturers focus their energy and materials on producing high-purity silver sponge for industrial applications such as solar panels rather than high-purity investment bars, and rising investment demand has in turn created a high demand for these specific bars, further creating tightness in the supply of said bars.
But what about the shortages in coins and 100 ounce investment bars? CPM Group surveyed Fidelitrade, Kitco and Northwest Territorial Mint (NWTM) last month and found “hundreds of thousands of ounces in 100 oz bars available for immediate delivery, and NWTM said it was steadily producing more each day.”
“In conclusion, there are short-term market developments along the lines of what CPM has repeatedly said to expect in February and March 2011, and there is spot tightness in high purity silver cast into bars as opposed to sponge. The rest is noise.”
In regards to the backwardation in March COMEX future prices, CPM analysts are not impressed and blame market congestion rather than supply deficits. They also point out that although the lease rate has risen to 0.8 percent from 0.3 percent, over the last three decades lease rates have ranged between 3 percent and 6 percent, making 0.8 percent still very low.
Still a good time to get into the silver market?
Yes! say those optimistic bullish silver bugs who see the price of silver surging higher and higher in the near to medium term.
James Turk, GoldMoney founder, has said silver is still in stage one of its bull market (gold, according to Turk, is in stage two) and won’t advance into stage two until the price of the white metal pushes past $50 an ounce, which he expects will happen in 2011. And because silver is still in the first stage of its bull market, it remains a good buy.
Speaking with Reuters at the annual Prospectors & Developers Association of Canada convention in Toronto Tuesday, Eric Sprott of Sprott Asset Management said silver will continue to outperform gold. “I watch where the money goes and the money’s going into silver. There’s as much money going into silver as into gold in dollar terms.”
But, a few say the time to enter the market has passed.
HSBC Global Asset Management analyst Charlie Morris says he still supports having some silver investment, but not picking up more at these prices and at this time. “Not to say I think it’s coming down, but I think we’ve missed it. Buying something overbought and chasing it is rarely a good strategy.”
Many analysts are still bullish in the medium to long-term, but advise investors to stay cautious in the short-term and heed silver’s seasonal cycle
Standard Bank’s de Wet advises, “If you’re long silver, stay long, but it’s probably not worth the risk/reward getting in now. It’s not called the devil’s metal for nothing.” I believe he’s referring to silver’s infamous volatile nature characterized by huge swings on the downside.
“Silver is surging and gold has made new all-time highs, but the technicals indicate that risk is high and that better entry points may be presented in the months ahead,” said MoneyShow.com senior editorTom Aspray.“For those who are not already long precious metals, my analysis continues to suggest that you will have a better risk/reward entry in the next few months.” Aspray is referring to the seasonal cycle of silver, in which late April, and the summer doldrums are traditionally marked by significant downside in silver prices, offering investors a chance to jump in the market at discounted prices.
Analysts are also warning of an upcoming pullback in precious metals prices before moving higher. Silver guru David Morgan told Mineweb’s Metals Weekly podcast listeners that he remains long-term bullish on silver with a price forecast of $40 for 2011; however, is exercising caution as he views gold as ready for a correction. “With all of this geopolitical tension it [gold] should be soaring to new highs and it’s not doing so. I’ve seen it time and again that people say gold is the best thing you can buy right now and I see it not reacting as favourably as it should be to what’s going on, on the ground on the political front. When that takes place the smart money usually is backing off the gold trade.”
Another bullish, but cautionary statement comes from CPM Group’s Jeffrey Christian, whose forecast puts silver trading in a range of $20 to $40 an ounce over the next few months, showing he fully understands the volatile nature of this market. CPM Group has advised “clients to not necessarily be buyers a $36,” while at the same time maintaining their long positions, buying “some puts to hedge against prices falling down.” Christian suggests investors looking to add to their silver holdings wait until the price pulls back to the $27 an ounce range, which he expects to happen over the next few months.
Besides the futures or ETFs market, there are still profits to be had in the junior mining sector.
Higher silver prices translate to higher silver miner share prices, notes Northern Securities analyst Michael Zylstra, who also points out that as prices for the metal rise the margins of producing juniors will as well. “A typical silver producer might have total cash costs around $5 to $10/ounce so, with the price of silver at roughly US$34/ounce, margins should be strong.” Exploration and development stage juniors will benefit from rising prices as well since majors will be looking to acquire further resources and increase production rates, making those juniors with promising projects very attractive takeover targets.
A look at the Silver Stock Index on Silver Investing News should give investors insight into how silver juniors are performing in relation to the silver market and against each other.