Silver’s performance has been stellar this year, but will loose monetary policy and industrial demand allow it to maintain its surge?
As Team GB celebrates second place on the Rio medals table, silver has seldom looked so good. It would appear that investors agree. Since the start of the year, the price of gold has risen over 25 per cent, but silver has outpaced it, rising by more than 30 per cent. It’s now at $18.89 per troy ounce.
Things looked very different in December last year. Following the Federal Reserve’s first interest rate hike in seven years, the price of silver plumbed a five and a half year low. But now, there are doubts that the Federal Reserve will hike rates again at all this year. A shock Brexit vote, US election uncertainty, disappointing economic indicators, negative interest rates and worries about excess credit have driven investors away from fiat currencies and into hard assets like gold and silver.
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“Silver prices tend to track gold prices closely, moving in the same direction on more than three quarters of all trading days,” says Adrian Ash, head of research at BullionVault. However, of the two metals, silver tends to be the more volatile. If gold is having a good day, chances are silver is having a great one, but it also falls further in bearish periods. “For every 1 per cent move up or down in gold, silver averages a 1.75 per cent change,” adds Ash.
More than a monetary play
But it’s not just economic uncertainty which has sent silver soaring. “Gold is a purely monetary play, but silver can also benefit from an upturn in the industrial cycle,” says Nitesh Shah, commodities analyst at ETF Securities. “It derives 30 per cent of demand from industrial applications,” says Simona Gambarini, commodities economist at Capital Economics. Its electrical conductivity and antibacterial properties mean that silver is used in everything from medicine and nanotechnology to water purification. Its presence in circuit boards found in consumer items like mobile phones and computers explains in part why Chinese buyers have been hoovering up silver futures contracts, and improving electronics purchasing managers indexes are further causes for optimism.
But it is in the photovoltaic cells and batteries proper to solar panels that silver shows most promise. According to a report published yesterday by Capital Gold Group, demand for silver used in solar panel manufacturing will “sky-rocket in the next five years” as the US, Japan, Germany and China try to bolster their green credentials.
According to the World Silver Survey 2016, solar cell production surged 32 per cent in China last year, thanks to generous government subsidies. And Capital Gold Group head Jonathan Rose expects that the country will account for 50 per cent of the growth in solar panel production and silver usage over the next two years.
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Supply and demand
If demand is high, supply is scarce. “In the past, there has been high mine supply. This year, it is expected to fall,” says Gambarini. Around three quarters of the world’s silver output is a by-product of mining for other metals, so cuts in capital expenditure and the closure of zinc, lead and copper mines over the last two years have effectively driven down the supply of silver as well.
Those silver miners which have kept production up this year are reaping the rewards, thanks also to lower production costs. The share price of New York-listed Hecla Mining is up 214 per cent on a year ago. FTSE 100 miner Fresnillo is one of the index’s biggest risers this year and produced 6 per cent more silver in the six months to the end of June than a year earlier. But boss Octavio Alvidrez only sounded half certain that this performance could be maintained, saying that “prices could continue at these levels.”
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Some are sceptical. Indeed, the price has slipped in recent weeks. “Silver went ballistic from the back end of May. There has been a billion dollar bet in exchange-traded funds alone,” says Tom Kendall, head of precious metals strategy at ICBC Standard Bank. “It has enjoyed a phenomenal run. But there needs to be a period of consolidation, before we can say that the price will continue to rise.”