Silver’s Image and its Potential Effects

By Michelle Smith – Exclusive to Silver Investing News

There are those who believe that gold will head to $2,000 an ounce and perhaps beyond. HSBC, for example, raised its gold pricing forecasts through 2013. Such optimism tends to be accompanied by the belief that silver will also rise, potentially to $50 an ounce, almost as if by default from gold’s success. But investors may want to play silver a bit wiser by viewing the metal through an independent lens. Despite the bright forecasts for its yellow superior, analysts are expressing concerns about the outlook for silver.

Last week concluded with analysts at both Barclays Capital and Deutsche Bank pointing to the potential for weakness in the silver market. Spencer Patton, Chicago-based chief investment officer for Steel Vine Investments, expressed beliefs that the Comex’s silver futures contract for December delivery will tumble to $38 by the end of September. Today, that contract opened at $40.67 and closed at $39.72.

Analysts point to a number of threats to silver’s performance including structural declines in the use of the metal for both photography and silverware. However, what is likely to be most prominent among them is the metal’s inability to shed an industrial image or to develop and sustain a widescale reputation as a safe haven.

There are some investors who have taken a position in silver to hedge against the risks of other assets. But, for the most part when investors consider silver and they consider a troubled economy, its industrial relevance trumps the fact that it is a precious metal. This is shown by today’s losses on the December futures contract which the CME Group notes accompanied liquidation of most  industrial/physical commodities.

The Eurozone troubles provide another indication of the image problem that silver is suffering from. At this point European debt is an undeniable fundamental for all types of investments. News on the situation can drive investors into and out of gold, equities and currencies. This weekend European leaders met on the looming threat of a Greek default but the meeting was largely fruitless. Instead of commitment to any action, the matter was postponed until October. This on-going uncertainty is credited for positive movements in both Treasuries and gold at open of US markets. However, silver is simply not luring safe haven cash on a notable scale.

Philip Newman, research director of precious metals with Thomson Reuters GFMS highlighted another potential issue for silver. Supply of the metal is increasing faster than that of most other metals he says.“For silver prices to remain supported as the supply increases, it will be important for investment demand to fill any gap that otherwise might exist between output and fabrication demand. Sometimes people forget you need investment demand to remain strong just to keep prices where they are,” he said.

Though economic concerns are growing, there are not yet reports of a decline in industrial demand  for silver. Still, considering the attitudes that have been displayed toward the metal and keeping in mind that prices fell during the previous global crisis, investors must face the fact that silver and gold could  travel different courses. There is a very real possibility that if the threats of a double dip recession linger, or worse yet materialize, that silver may take a take a hit while the perceptions of gold as the ultimate currency may strengthen.