Precious Metals weekly – Silver in focus

door: Georgette Boele

140716-Precious-Metals-weekly.pdf (523 KB)
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  • Precious metals are under pressure this week
  • Silver demand to slide more than supply this year
  • Silver mainly tracks gold and this will likely continue this year

Under pressure this week

Since this week precious metals have come under pressure. Silver and gold have lost more than 3% so far this week, followed by platinum (-1.8%). Palladium was once more the strongest precious metal. Expectations that Fed Chair Yellen might sound less dovish and easing of safe demand have hurt gold prices. Weakness in gold prices has also spilled over to the other precious metals. Below we will focus on the dynamics in silver.

Silver demand to slide further this year…

As is the case for gold, market conditions for silver are not tight. Supply continues to outpace demand despite lower mine supply and lower scrap supply. Demand for silver is expected to come under more pressure this year. The main culprit for our negative demand outlook is the liquidation of a part of the substantial investor positions. It is likely that this will be triggered by an upward adjustment in expectations for the future path of Fed rate hikes, a higher US dollar, constructive investor sentiment and lower gold prices. Granted, we expect silver industrial demand – the largest demand category – to remain strong and to rise even further driven by a strong US economy and an improvement in the Chinese economy. But this rise will be more than completely offset by lower jewellery, photographic and investor demand.

…and outpace the modest reduction in supply

We expect a modest decline in silver supply for this year. Mine supply is relatively price inelastic, because silver is mined as by-product of gold and/or base metals. Therefore, mine supply is more dependent on the mining activity of the other metals than on silver price developments. In contrast, scrap supply is very sensitive to silver price developments. For example, lower silver prices have resulted in lower silver scrap supply. It is likely that scrap supply will continue to move lower, because of the low prices.

The absence of a strong character

The correlations between silver and various market variables suggest that silver does not have a strong character. Silver has typically been less cyclically-driven than platinum and palladium. This is reflected by a lower positive relationship with US equities. Moreover, silver like gold has a positive relationship with US equity market volatility, which explains its moderate safe-haven characteristic. What is more, it has a negative relationship with the US dollar (like gold). The latter two characteristics have been dominant for some time now. Therefore, silver prices have tracked gold prices. We expect this behaviour to continue as long as investors have not liquidated a substantial part of their positions. Such liquidation will happen this year, in our view. Once such liquidation is behind us and the global economy continues to strengthen, silver’s character will likely change towards a more cyclical precious metal. Then, silver prices will likely disconnect from gold prices.

correlation

Weekly 16 July