Appraising Silver’s Underperformance

Bearish and bullish sentiments at crossroads
By Heide B. Malhotra, Epoch Times
May 8, 2013 Updated: May 8, 2013

Market bulls are certain that silver is underperforming, while market bears state that they expect a downward spiral in the price of silver. Some silver market experts suggest that the bulls have been riding too high and others see the bears as being too pessimistic.

Some bears suggest that silver hasn’t bottomed out, predicting that the price could drop to $20 an ounce. On the other hand, an April 25 article on the Money Morning website was bullish, predicting that silver prices could go up to $250 per ounce.

“While gold and silver prices took a pounding, silver investors were not running to unload their silver—quite the opposite. In fact, savvy investors were flocking to buy physical silver,” suggests the Money Morning article.

Since the beginning of 2013, the bears have seen their predictions hold true. On Jan. 2, the price of silver was $30.90 per ounce, according to a historical chart, published on the Kitco website.

Silver’s 2013 high was $32.03 per ounce on Jan. 31, after which it kept sliding down to a low of $22.90 on April 24. Catching its breath, it started moving up, reaching $24.40 on April 30. On May 2 the New York Spot bid price for silver was $23.70 at closing.

The significant drop (21 percent) in silver prices between the beginning of January and April 30 resulted in people selling their silver, expecting the price to keep sliding down. With the supply of silver up, the price started its downward slide.

Yet, the Money Morning article suggests just the opposite, “Silver investors were not running to unload their silver—quite the opposite. In fact, savvy investors were flocking to buy physical silver.”

Drivers Pushing Silver Prices Upwards

“Even as silver prices dropped, buyers stepped up, and supply became so scarce, premiums nearly quintupled from 8% to 37% above spot prices,” states the Money Morning article.

The above article suggests several factors that would indicate an upswing in the price of silver. The first one is that silver bulls have not stopped buying silver whenever it is available.

The Casey Research website, reports an upsurge in silver exchange traded funds (ETF), and agrees with Money Morning, stating that by the end of the first quarter in 2013, ETFs have increased their silver holdings by 5 percent.

The funds are adding to their silver holdings in anticipation of an economic recovery and with it they predict a significant increase in the price of silver. According to Money Morning, ETFs increased their silver holdings by 20 million ounces of silver, valued at $600 million, over the first quarter of 2013.

Then, the latest Commitment of Traders Report (COT) from the Commodity Futures Trading Commission suggests that speculators were shorting their silver positions. An interpretation of this is that the silver price is either at or near its lowest point.

“In the weeks surrounding the April silver price selloff, silver short positions reached their highest levels in nearly 20 years. That’s an extremely bullish indicator for higher silver prices ahead,” stated the Money Morning article.

Bullish Silver Demand

In the 21st century, the global demand for silver kept the 2012 cumulative average price for silver at the second highest ($31.10) per ounce, right behind 2011, when the cumulative average was $35.10 per ounce, according to a historical chart on the Kitco website.

“While last year [2012] was a volatile year for most precious metals, globally, silver investment rose to a total of 252.7 million troy ounces,” according to an April 24 article on the Silver Institute website.

Bullish investor demand for silver was strong last year, however the demand of silver for industrial use dropped by 4 percent given the unstable economic environment. Investor demand kept the demand for silver on an upward trajectory last year.

Anything silver is up for grabs. During the first four months of 2013, the United States Mint sold 18 million American Silver Eagle Bullion coins, over half the amount it sold in all of 2012 (34 million).

“With investors buying 56 times more physical silver than physical gold, Main Street is setting the pace, while Wall Street is oblivious to the trend,” suggests the Money Morning article.

Silver’s Industrial Value

“Industrial demand for silver has increased substantially over the past two decades and is expected to soar to a new record level in the coming year,” according to a mid-March article on the Silver Institute website.

Between 1992 and 2001, the industrial sector used on average 313 million ounces of silver, while between 2012 and 2014, on average over 483 million ounces of silver will be used by the world’s industries, which is a projected 54 percent increase in annual industrial silver consumption.

According to market experts, 70 percent of all silver mined is for industrial used. Industries such as electronics, solar power, and computers employ silver for producing goods. People prefer silver cutlery and women still love their silver jewelry. Silver is also used in the health and medical industries.

“Silver withstands extreme temperatures, serves as an excellent reflector of light and conductor of heat and electricity, and is a natural anti-microbial agent,” according to the Silver Institute.

Being bullish or bearish when it comes to silver, the final decision to buy or sell is the prerogative of the investor. However, as several market experts have stated so eloquently, one should educate oneself, look at different factors that could be a predicator of silver price movements and then still be cautious, because no one is infallible.