Silver set to shine in 2012
Talk of precious metals and investors' minds almost automatically turn to gold, while its sidekick, silver, takes a back seat.
Yet, if history is to repeat itself, maybe investors should be paying more attention to silver.
In the latter part of the 1970s precious metals bull market, gold gained over 700 per cent, but it was silver that soared a breathtaking 1,400 per cent.
'Silver is the second most useful commodity known to man after oil, with over ten thousand uses,' explains Mike Maloney, author of Guide to Investing in Gold and Silver: Protect Your Financial Future. 'When you're typing on a keyboard, you're typing on silver. When you look at a DVD or CD, you're looking at silver. When you look at a mirror, you're looking at silver. It's everywhere,' he said.
In fact, silver's wide industrial use due to its superior electrical conductivity and catalytic properties has been the vital element in its price. According to The Silver Institute, industrial applications accounted for almost half of silver's demand in 2010.
But that may not be the case anymore. 'What's going to drive the price for silver is investment demand,' voices Maloney. 'When gold gets too expensive for the public, they switch their preference to silver. This is what happened back in the late 70s and early 80s. Silver lagged gold, and then exploded as gold got too expensive.'
This rings true. Investors may hesitate plunking down $1,700 (£1,085) for an ounce of gold, when they could pick up more than 50 ounces of silver for the same amount.
Thomson Reuters GFMS reflects this view. In its report, The Silver Investment Market – An Update published in November 2011, it says that 'a good part of the reason for the growth in investor interest in silver has been the continued rally in gold – the white metal arguably providing a less costly and more leveraged alternative to the yellow one'.
And figures published by The Silver Institute are testament to this. Investment demand as a portion of total demand has been growing considerably in the past two years and accounted for more than a quarter of the total demand in 2010. This is a far cry from 2001 to 2008, when investment demand made up about 7 per cent of total demand.
Accordingly, banking giant HSBC has raised its silver price forecasts for 2012 and 2013 amid expectations that strong bar and coin investment demand, coupled with growing interest in silver ETFs, will boost the market.
It now expects the silver market to average around $34 a troy ounce in 2012 and $32 an ounce the following year – both signalling a 2 per cent increase on its earlier forecasts.
Analyst James Steel says: 'Silver prices will reflect the interplay of many factors. The single biggest bullish factor, in our view, will be renewed investment demand.'
HSBC sees ETF demand absorbing as much as 50 million ounces of silver in 2012.
Morgan Stanley is also backing silver, along with gold, as its preferred commodity for 2012. Analysts Hussein Allidana and Peter Richardson say the defensive nature of the metal will create significant investment demand as investors clamour for a safe haven amid the volatility of the global financial markets.
Silver firms bullish
Banks aside, silver companies have also been bullish on the metal's future, albeit unsurprisingly. The chief executive of Coeur d'Alene Mines Corporation, owner of the biggest US silver mine, was recently quoted by Reuters as saying that events in the eurozone, together with the large US deficit, will continue to provide a positive backdrop to the silver price.
Mitchell Krebs believes that in the short term, the metal could prove to be more volatile than gold, but will nevertheless continue to move upwards as the end of 2011 looms.
Coeur is on track to ramp up silver production by 19 per cent this year to 19.5 million.
Thomson Reuters GFMS notes that institutional money in silver has largely been driven by hedge and managed futures funds, which have been 'attracted by silver's upside potential and the metal's high price volatility'.
Meanwhile, retail investment has been dominated by India and China. The report verifies that while the Chinese investment market has realised year-on-year growth since it was liberalised in 2009, Indian demand has been far more volatile, with 'record net demand during 2008 giving way to heavy disinvestment in 2009'.
Looking ahead, Thomson Reuters GFMS is optimistic for the price of silver, 'with the potential of prices nearing, if not exceeding, $40'. It declares that the current global economic and financial backdrop, along with the eurozone crisis showing no signs of abating, further reinforces silver's safe haven status.
However, a bearish economic outlook may also be the reason why investors won't rush into silver as a safe haven, given that half of silver's total demand is from industrial uses. In 2010, silver's correlation with the price of copper, which is used as a bellwether for how the global economy is doing, was 0.64, versus 0.58 for gold, which is a pure safe-haven play. While this may not be a huge difference, it is important.
Additionally, the Reuters report warns that should silver exceed $40, 'some unwinding may occur, principally of institutional positions, given their focus on upside price potential'. It also says that dollar strength or euro weakness 'may create some downward pressure'.
Maloney is much more bullish on silver's price trajectory. He cites the lack of supply of silver as a major reason for his optimism, noting that there is five times more gold for investors than there is silver.
Consequently, he maintains that silver being one fifth of the price of gold is 'perfectly logical'.
This was written for our sister website, Interactive Investor