Does Silver Deserve Gold's Price Slump?
Truth in Gold

Silver is being undermined by its association with gold.

While makers of everything from jewelry to solar panels are buying the most silver in nine years, prices are languishing. Investors are dismissing industrial demand and instead focusing on the waning appeal of precious metals as a haven, with the Federal Reserve paring economic stimulus measures, inflation muted and equities rallying.

Silver has been dragged down by a yearlong slump in gold, the commodity most widely held by investors in exchange-traded funds, following a decade-long rally that saw prices for both surge more than sixfold. The five most-accurate precious-metals analysts tracked over the past two years predict silver will average $18.80 an ounce in the third quarter, the lowest since 2010, and gold will drop 7.8 percent.

"The industrial driver can help, but I don't think it's as influential as the investor," said Robin Bhar, head of metals research at Societe Generale SA in London. "Investors were bullish silver because gold was in a bull market. Now that we have gold in a bear market, there's less enthusiasm coming from investors."

The correlation has been strong. From December 2008 to June 2011, silver tripled and gold surged 70 percent, with both touching all-time highs, as the Fed pumped more than $2 trillion into the financial system and cut interest rates to a record in a bid to boost the economy. Last year, when signs of economic growth sent gold down 28 percent, silver plunged 36 percent. The declines were the most for both metals since 1981.

Price Slump

Silver is down 16 percent in London during the past six months to $19.2008, while gold slid 3.9 percent, according to Bloomberg generic pricing. The Standard & Poor's GSCI Spot Index of 24 commodities rose 4 percent over the same period. The MSCI All-Country World Index of equities gained 3.7 percent, the Bloomberg Dollar Index was little changed, while the Bloomberg Treasury Bond Index is up 0.6 percent.

Concern over the value of haven assets is trumping signs that industrial demand is improving. Half of silver supply is used to make things, more than the 10 percent for gold, and demand is picking up as economic growth fuels sales of electronics and cars from China to the U.S.

Since precious metals generally earn returns only through price gains, silver investors were "disillusioned" by the slump over the past year and put their money elsewhere, New York-based researcher CPM said in an April 29 report. Investment demand tumbled 42 percent last year to 105.3 million ounces, the lowest since 2008, according to CPM, which forecast average prices in 2014 will be lower for a third straight year.

Industrial Uses

At the same time, fabrication usage including by makers of cars, jewelry and tableware will rise 2.9 percent this year to 890.7 million ounces, the most since 2005, CPM said. Silver content is increasing in vehicles with more electronics, according to Metals Focus Ltd., a London-based research company. After dropping last year, demand from electronics and battery makers will rebound in 2014, CPM forecasts.

Cypress Semiconductor Corp., based in San Jose, California, is working with companies that make silver sensors that can replace the widely-used iridium-tin-oxide sensors, founder and Chief Executive Officer Thurman Rodgers said on an April 17 conference call.

World Growth

Most industrial metals will get a boost from growth. The world economy expanded 2.1 percent in 2013 and will increase 2.8 percent this year and 3.1 percent in 2015. While that will help spur a 2.1 percent gain in industrial and photographic demand for silver, investors will sell 250 metric tons from funds backed by the metal, Barclays Plc estimates.

"Silver is not benefiting even though it has so much industrial use as people still call it a precious metal," James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $357 billion in assets, said. "Its a tug of war between its safe-haven appeal and its use as industrial metal."

Policy makers have cut monthly bond purchases four times, to $45 billion yesterday compared with $85 billion in November, and signaled that borrowing costs might climb as soon as next year. The U.S. economy will expand 2.7 percent this year, from 1.9 percent in 2013, and reach a 10-year high of 3 percent in 2015, economists said.

Hedge funds have cut their bets on higher silver prices by 90 percent in the past two months on the Comex in New York, holding a net-long position of 2,620 futures and options in the week to April 22, U.S. Commodity Futures Trading Commission data show. The five-year average is about 20,510 contracts.

ETP Investors

Exchange-traded-product investors are more positive, owning 19,668.8 metric tons valued at $12.13 billion. Holdings are up 1.5 percent this year and are 2.2 percent below the record reached in October. Gold ETP holdings are down down 24 percent in the past year and slid on April 21 to the lowest in more than four years.

Rising demand also may give prices a boost. European car sales advanced a seventh consecutive month in March, while cars and light trucks sold in the U.S. at a 16.3 million annualized rate in March, the fastest since May 2007, according to data from Ward's Automotive Group. China's passenger-vehicle sales jumped 7.9 percent in March.

Industrial consumption and photography usage will increase to a combined 16,442 tons this year, the most since 2011, and rise another 2.9 percent in 2015, Barclays estimates.

'Get Support'

Coin sales to retail investors also are up. The U.S. Mint sold 18.47 million ounces of American Eagle silver items this year, data on its website showed. That compares with 18.3 million in the first four months of last year, which was the most for the period since at least 1986 and occurred mostly before an April 12, 2013, plunge in gold set off a decline in precious metals.

"It's reacting to some extent with gold, but we still think it's mainly driven by industrial demand," said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. "Silver will get support from an improving global economy, which should be reflected in higher industrial demand. I would not expect a sustained fall."

While the U.S. and Europe are poised to expand, China, the second-biggest user after the U.S., is slowing. The economy will grow 7.3 percent this year, the least since 1990. The nation's silver imports dropped 36 percent from an almost three-year high to 228 tons in March, compared with a five-year average of 313.1 tons, customs data show.

Surplus Output

Silver production will exceed demand by 6,482 tons this year, up 4.4 percent from 2013, Barclays says. Inventories tracked by the Comex in New York are up 75 percent since mid-2011 and in March reached the highest since 1997.

Prices rose or fell more than 20 percent annually in seven years since 2003, more times than for gold, platinum and palladium. Silver has entered 12 bear markets in a decade. The volatility is a "significant deterrent" for investors, UBS AG wrote in an April 14 report.

The metal will average $19.70 this quarter and $19.20 in the final three months of 2014, the median of the best analyst estimates show. Goldman Sachs Group Inc. sees prices at $17.50 in 12 months as gold slides 19 percent to $1,050 an ounce, from $1,291.60 yesterday. The top-five analysts tracked predict gold will average $1,191 in the third quarter and $1,170 in the fourth.

Goldman said in an April 13 report that in the long term, silver tends to track gold, and its forecast reflects the historical ratio to gold. An ounce of gold bought 67.21 ounces of silver in London yesterday, the highest since July. The average over the past 30 years is 64.8.

The link with gold is stronger than that with industrial metals. The mean of silver's 30-week correlation coefficient to gold was 0.86 over the past five years, compared with 0.51 with the London Metal Exchange Index of industrial metals. A figure of 1 means two assets always move in the same direction.

"The precious-metal characteristic is likely to dominate," said Barnabas Gan, an analyst at Oversea-Chinese Banking Corp. in Singapore, and the second-most accurate precious metals forecaster over the past two years. "The risk of higher real interest rates may likely magnify in the middle- long run, and thus raises the opportunity cost for holding silver. The improving global economic picture is also likely to pale safe-haven demand."

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