2013′s Silver Lining

While silver’s drop last month might be the overlying memory for those looking back at silver in 2012, we mustn’t forget its stellar performance since June lows of $26.13 rising to above $33 in early December. According to a survey carried out by Bloomberg, analysts, traders and investors see the silver price rising around 29% in 2013.

Back in November we outlined how we expected Barack Obama’s re-election to impact the gold price. While we didn’t look at silver as well, we fully expect this political event to have exactly the same impact, silver was after all one of the best performing financial assets in Obama’s first term. It has nearly tripled since 2008, coming second only to platinum, thanks to increasing promises by Obama and other Western governments to ease the system through the financial crisis.

Silver’s Industrial Nature

In recent years we have seen silver investment demand compensate for any slowdown in industrial demand. This is expected to continue into next year as investors continue to work to protect themselves against currency devaluation, more of which is expected in 2013. In previous episodes of quantitative easing announcements, silver has outperformed gold – between December 2008 and March 2010 it gained 53%, almost double that of gold.

While silver’s volatility is often blamed on its industrial uses (53% of silver is used in industry), this is also its saving grace. A recent survey commissioned by the Silver Institute finds industrial demand has declined by 6% this year, to 454.4 million ounces, although these will be more than made up for next year and more so in 2014 when industrial demand is expected to reach record levels of 511.6 million ounces.

Currently 70% of silver mined is used for manufacturing, its applications are still increasing primarily thanks to the environmental market where silver is used in solar panels – 40 million ounces of the precious metal was used in such products this year. Demand for it in other industrial items such as medical instruments, phones and food packaging are also increasing.

Silver Investment Demand

Despite the recent price drop suggesting less people wish to sell silver than buy silver, we cannot ignore the record demand for silver investment this year. Holdings in silver-backed exchange traded products reached a record 18,854 metric tons in November. Bloomberg data shows investors have added 1,464 tons to their holdings this year, bringing the total value of holdings to around $19.2 billion. Ted Butler points out that holdings in SLV have seen more stability in the last year and a half than GLD holdings.

Holdings of SLV are “much more diverse” according to Ted Butler than those of GLD, for example institutional holders of SLV only account for 16% of total holders, compared to 41% in GLD. Therefore when we see huge sell-offs, the majority of SLV holders remain where they are indicating they’re in it for the long-term.

Gold/Silver Ratio

The gold/silver ratio at present suggests silver is undervalued. Even though the ratio was down to 30 at the end of Q1 2012, this didn’t last very long. Having been at 50 prior to the financial crisis, it has pushed near 60 in the last year. At the time of writing it is around 55, meaning one ounce of gold will buy you one ounce of silver. Judging by recent reports many expect this to go down to as low as 20 next year as silver pushes to rise faster than gold.

Silver Supply & Demand

Speaking of ratios, what about the ratio of silver demand to gold demand, or silver supply to gold supply? Sprott outlined for us late last year that the ratio of availability of physical silver to gold for investment purposes is approximately 3:1. However, demand is for physical silver is well above this, how long is it sustainable for?

As Sprott explained, investors are now buying around 50 times more physical silver than gold. Sprott writes “our favorite question to the bullion dealers we meet, is to ask the ratio of their dollar sales in gold versus silver. The answer is that dollar sales are equal, which means that physical silver sales relative to gold are greater than 50:1.” Elsewhere, ETF silver holdings were nearly ten times in the last five years were ten-times that of gold.

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