Silver’s Downtrend: Just Volatility?

Silver ended 2011 just shy of $28. However, as we bear down upon 2012′s mid-year mark, we are now watching it struggle to stay above $28, almost as if the market has gone virtually nowhere. Yet, those who have been invested in the white metal know that that isn’t the case. Silver had a stellar start this year, one of the best in decades. The metal climbed over $9 dollars to touch a year to date (ytd) high of $37.23. But, for the past couple of months the market has been in decline raising the questions: Is this is just run of the mill volatility and if so, what will save silver?

Investors may recall that analysts were generally positive about silver’s performance this year, with many suggesting that 2012 could mark the moment in time when the metal reached or surpassed $50. However, it must also be remembered that analysts didn’t suggest that it would be a smooth ride in any particular direction.

Actually, of the 25 analyst forecasts reported by the London Bullion Market Association (LBMA), $28 was the highest of the low prices projected for this year. Mitsui and Company analyst David Jollie predicted that silver could drop as low as $19.20 but still expected the metal to average $30.95.

Some suggest that the current weak prices of the metal and its miners, means that this is a buyers market.

“When silver exhibits volatility, volatility in equities is exaggerated, and that creates opportunity,”Chris Thompson of Haywood Securities told the Gold Report.

This suggests that believers in silver should be rushing to snap up the bargains, but for the most part, this isn’t happening. On the contrary, as prices have fallen investors have been packing up and leaving camp. Of late, there have been exits from futures, ETFs, and physical holdings.

Sure silver is a volatile market. After all, that is why it’s called the devil’s metal. But, many investors identify volatility as ups and downs. Silver has been in a downtrend on daily charts for two and half months. With prices now hoovering only slightly above the levels seen at the end of last year and with the memories of wounds incurred from the 2011 market volatility still fresh, many investors are undoubtedly risk averse at this point.

Even Thompson says if we see a significant breakdown from $28, it may compromise his firm’s forecast of an average $36 for the year.

Given the recent losses of investment support, many investors have begun looking at the metal’s industrial support and they are not finding encouragement.

For many people, there is little question of whether there will be a recession in the Eurozone. The greater concern is how severe will it be and how it will play out on a global level. There is less debate these days as to whether China is actually slowing down as people instead try to gauge how drastic the nation’s slowdown will be and what that will mean on a larger scale. There is also increasing skepticism about India’s silver demand, with ScotiaMocatta predicting the nation’s imports could drop by 27 percent this year.

This week’s opening provided yet another example of the silver market disregarding potentially bullish news. The Chinese Premier Wen Jiabao made statements about the importance and urgency of policies that will prevent China from slowing too rapidly. The markets interpreted these remarks as a willingness to take accommodative fiscal measures. Other metals, such as gold, copper, and platinum received a boost and came out of the gate on the rise Monday, but not silver.

CME Group says the market seems to need real action from central bankers instead of hints of action from central banks and/or Chinese leadership.

In other words, investors want a solid indication of where support for the market will come from. Meanwhile the shaky outlook for investment demand and economic turmoil comes amidst an environment where the supply situation is not helping matters.

Higher silver prices have had what is often described as a “positive effect” on silver production. There are often reports of producers, both major and minor reporting or projecting increased output of silver.

Volcan (OTC Pink:VCANF), for example, a major silver miner in Peru, and has recently announced expectations to produce an extra 1.5 million ounces this year.

With the release of the Silver Survey 2012, the Silver Institute reported a continuing trend of supply outpacing fabrication demand. This imbalance could be set to get worse.

CPM Group’s Silver Yearbook 2012, released last week, says silver supply may surpass 1 billion ounces for the first time this year.

According to CPM Group, the largest increase in silver fabrication demand last year came from the solar panel industry, but demand from that sector is expected to decline this year. As a result electronics is expected to be the largest driver of growth this year.

While CPM Group says investors will continue purchasing silver this year, they are looking for net investment demand from this source to also drop in 2012 by about one percent to 131.7 million ounces.

There is a lot of airtime given to bearish sentiment at this point but there are also those that suggest that market may not be headed for imminent doom.

Standard Bank is not yet bullish but expressed beliefs that most of the price decline has taken place already.

Looking back at the analysts’ forecasts, many predicted a silver price between $31 and $36 range. Thus far this year, the ytd average silver price is $31.89.

Furthermore, this year’s trading range is only about $10, which is far less than most analysts suggested it would be. For example, Sharps Pixley issued a forecast with a $30 trading range. This indicates that compared to analysts expectations, silver’s price movements thus far have been on the mild side.

Renowned investor and founder of Sprott Securities, Eric Sprott still describes silver as the investment of the decade.

Tell us what you think. Are we just experiencing normal market volatility and if so where will silver find support for a rebound?

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