The Silver Institute: Bargain Buying Gives Way to Safe-Haven Purchases

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The Silver Institute released its “World Silver Survey 2016” Thursday, reporting both tightening supply and increaing demand for the precious/industrial metal.

Two-Month Trial: Metal Buying Outlook

According to the report, the silver market saw record demand in 2015, with the jewelry, coin and bar, and photovoltaic sectors posting new highs, helping to boost total silver demand to 1.17 billion ounces last year. Overall silver supply to the market was lower, led by the continued weakness in silver scrap sales. Last year’s supply and demand scenario led to the third successive annual silver market deficit, reaching 129.8 million ounces, more than 60% larger than 2014 and the third largest deficit on record.

You can install PV panels on our roof, collect a tax credit and bring down your own electricity bill. A wind turbine? Not so much. Source: Adobe Stock/rob245.

More silver panels this year, but less silver per panel. Source: Adobe Stock/rob245.

“We expect the silver price to average $15.90 this year and that’s going to be defined by an overall upward trend,” said Erica Rannestad, precious metals demand senior analyst for Thomson Reuters GFMS, who contributed to the report. “We’ve seen prices reach highs last week and we expect that trajectory to continue through the 4th quarter of this year.”

Rannestad said in an interview that the bargain buying of the last two to five years, in the silver market, has largely given-way to more sophisticated investing as a weak dollar has heightened the white metal’s demand.

“Last year, it was a bargain buying environment. That’s why you saw coins and bars — products of physical silver — increase to record sales levels” Rannestad said. “That was continuing the theme we had seen over the last two-to-four years. However, in 2016 we have seen a shift away from physical products and toward renewed interest in exchange-traded products and derivatives contracts based on silver. Going from a bargain buying environment, which had benefited physical demand, and shifting over to more of a price-driving environment, where we’ve seen higher ETP demand and a shift toward higher interest among investors in the derivatives market.”

According to the report, the reason for that shift is the reemergence of the safe haven factor. Fundamentals buyers have now been joined in the market by investors whose purchases are more long-term in nature. The short-term buyers have come back, mostly, on the long side of the market.

“We believe the human factor will remain an important one for the rest of this year. The reason we think that is we have seen a shift in investor expectations about global growth, over how much developing economies contribute to it, Rannestad said. “Developing economies, since the financial crisis, had really been the engine of any global growth at all. Now, we’re seeing the slowdown in China and other developing economies weigh on growth. That will remain a big concern throughout the year. That is price positive for silver, so long as that concern remains.”

Solar Impact

Silver demand for photovoltaic applications rose 23% in 2015 to 77.6 million ounces, marking the second consecutive year of increases in this sector, driven by strong growth in Chinese solar panel installations. However, looking forward, the actual products continue to become more efficient and the amount of money spent on silver in each panel is declining.

“Last year, I wouldn’t say was an anomaly, but because we had prices so low they were already reduced relative to the previous few years and that thrift rate still remained pretty high,” Rannestad said. “Depending on the growth rate of new installations — highly uncertain because it is such a new market — if it can’t offset the thrift rate, then you’re going to see flat demand or maybe even slight declines despite increasing installations. It’s quite uncertain how fast the market will grow, but the real point is that market is going to remain a sizeable and growing share of industrial demand.”

Electronics Demand

Electrical and electronics use declined by 10% last year to 246.7 million ounces, due to slower economic growth in developing countries and the continued weakness in computer sales.

The main reason, Rannestad said, for the decline last year was the slowdown in developing economy growth and the miniaturization of mobile devices.

“The miniaturization trend was actually not as much of a factor as it has been in recent years. There was a decline in personal computer sales largely due to the cannibalization of the personal computer market by tablets that was also felt,” the analyst explained. “A lot of those factors were not as significant as they were in previous years. Those will likely shake out in the next few years. You can see some weakness in the short term but after that the market is pretty positive.”

Dearth of Mining Leading to Deficit

In 2016, Thomson Reuters and the WSI expect the first decline to occur in 13 years for overall silver supply.

“Right now that’s being driven by production cuts in a lot of the zinc industry,” Rannestad said. “Zinc mining companies are cutting back production and that includes secondary silver production. You will see that spillover into gold and copper, but it’s not going to be as big a factor in those sectors. Some copper producers, in recent years, were processing stockpiles of silver-reach concentrate that had been built up over many years just to monetize a sitting asset. A policy change in China is also going to introduce more stringent regulations to mining companies there. We do expect a decline China which, as a nation, is a significant producer.”

Free Download: The April 2016 MMI Report

China has increased the design capacity requirement for mines from having capacity 30,000 metric tons of ore on hand to needing to have the ability to process 100,000 mt. Although its impact on existing mines there is in question, it will have a direct impact on the opening of new mines there. There will be a longer-term impact on future Chinese mining due to the regulation.

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