But what about silver? This has been a question we hear almost every day. Though gold tends to be the precious metal of choice for analysts and financial news outlets, silver is often thought of as the “people’s metal”. Every day investors seem to favor the stuff in a wide variety of market conditions. Those who do like it have cause to celebrate in 2012, as we have started out the year with a 23% gain in silver prices in less than 30 days. This compares to less than 5% for gold. So what’s going on?
First we’ll speak a little to the supply side of the equation. Silver mine output and recycling production have been steadily rising for several years. With the price of silver at multiples of the cost of extraction, there is little doubt that new exploration and mining operations will continue to drive solid supply into the foreseeable future. One would think this would effectively cap the price of silver. Not so fast. Analysts estimate that annual mine supply will increase by somewhere around 1 to 3% per year. Though this is a notable increase, it pales in comparison to the rate at which investment demand is increasing.
Of the three major components of annual silver demand, investment, industrial, and jewelry, the latter two have remained relatively constant throughout the last several years. Industrial demand sank in 2008 with the global economy, but has since recovered to pre-2008 levels. Don’t forget that nearly every electronic device in the world uses silver components. Thus the industrial demand component of the silver price is very resilient when compared to that of other metals and raw materials. Even through this global recession, personal cell phone and computer ownership has still skyrocketed worldwide, driven primarily by emerging market demand. People often make the mistake of assuming that silver will follow other industrial commodities down the toilet when global production of hard goods slows down. This may be true in the short term, but the industrial demand for silver is a unique animal and should not necessarily be lumped in with the rest of the herd.
Finally there is the investment demand component. Silver demand from investors has increased exponentially in the last several years. In the last five years, silver ETF holdings have increased from less than 1000 tons to over 12,500 tons. That’s an increase of more than 1250%. Coin and bullion dealers have experienced the same explosion in investment interest. Even the US Mint has run out of silver several times in the last three years, prompting purchase limits and ending scheduled runs of coins. Mine supply over the same period has increased by less than 25%. Now you can see why the price has reacted so severely.
Looking forward, it’s hard to judge exactly how investment demand for silver will play out in 2012. After last year’s brutal correction, silver has lost a bit of luster among some investors. That said, this year’s 23% gain in less than a month could very well cause some selective amnesia, even among those who rode the silver train down more than $10 per ounce in the second half of the year. None of those losses were enough to keep some major players from making seriously strong silver predictions for the year ahead. David Morgan has called for $60 silver by year end. HSBC Securities has published a prediction of “$40 per ounce or more” for 2012. Gijsbert Groenewegen of Silver Arrow Capital Management told Forbes this morning that a weakening dollar could push silver as high as $200 per ounce in a low interest rate environment. Whether you buy these astronomical price targets or not, it’s evident that investors are still watching gold’s little brother very closely. Don’t forget that silver has significantly outperformed gold in several of the last ten years. Is this strong start to 2012 and indication that this could happen again? Either way, it’s sending a pretty clear message: Silver is here to stay.