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May
15
2019

Finally, Silver Prices May Have Bottomed, But What Happens Next?
David Lin

Silver may have finally hit a bottom as the metal trades near the lowest point in four years, this according to a report published by Sprott. 

“At ~$15, the silver price is close to levels not seen since 2015 and we see little downside risk at this level. Any future economic hiccups and market sell-offs are likely to encourage investors to look for safe havens and alternatives to traditional financial assets,” the report said.

The macroeconomic outlook points to an increased physical deficit for silver, but higher investment demand is what will ultimately drive prices up, said Maria Smirnova, senior portfolio manager at Sprott Asset Management. 

“Today, with the price of silver hovering at $15 per ounce, we see tremendous investment upside — with little downside — given that we believe the metal’s tepid price performance masks very positive developments in the market,” she added. 

Higher investment demand is likely to come from coins, bars, ETFs, as well as silver contracts by non-commercial entities, Smirnova said in the report published Friday. 

“Of these, we believe that the silver futures market is having the biggest impact on silver prices… there is a clear correlation between net speculative positions (longs net of shorts) and the price of silver,” she added. 

According to the report, 2016 saw speculators take on more long bets in silver, which was followed by a drive up in silver prices. Since then, short positions have been observed to depress the price. 

“We believe this short trend has been due to a growing U.S. economy and the general U.S. equity market (the S&P 500 Index) being in a multi-year uptrend,” the report said. 

On supply and demand fundamentals, the report noted that silver’s deficit has widened in recent years.

Last year saw a three-year high in silver demand, up 2.5% compared to 2017, while supply declined by 2.7%. Demand was driven primarily by a recovery in retail investment, led by silver bar demand. 

The report noted that the silver market has seen a physical deficit in six out of the past ten years, but silver prices have not responded to this reality. 

“This signals to us that the silver price has fallen victim of to silver ‘paper’ market trading and weakness in investment demand,” the report said. 

On the side of physical demand, silver continues to see boosts from a rise in jewelry and silverware fabrication and a 20% jump in silver coin and retail demand. All of these contributed to an overall increase of 4% in physical silver demand last year. 

While the retail and jewelry market paint a positive story for silver, the industrial front has seen stagnating demand growth. 

Industrial uses and electronics demand for silver remained relatively stable while steady growth from the photovoltaic sector has offset the decline in silver for photography, the report said. 

On the silver supply side, the report pointed to three primary reasons for its decline: weaker mine production since 2015, a decline in scrap supply, and a decrease in government sales of silver since 2014. 

The report concluded that currently, the precious metals’ value lies in their ability to protect against market downside. 

“We strongly believe that both gold and silver are valuable hedging tools in times of uncertainty and volatility. When the S&P 500 plummeted 20% in the three months to Christmas Eve of last year, silver gained about 12% from its lows,” the report said. 

By David Lin

For Kitco News

 

 

David Lin is the Associate Producer for Kitco News. He graduated from McGill University with a Bachelor of Commerce, majoring in Finance. During his studies at McGill, he served as editor for The Bull & Bear, McGill's business school magazine. Prior to joining Kitco News, he was a macroeconomics researcher for BCA Research. 

 

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