Silver has been trading sideways so far in 2013, but what will the rest of the year bring? Will 2013 be the year silver prices break out or crash and burn? What is a sustainable silver price for mining companies and where will the metal come from to supply the next generation of industrial and investment demand? Most important, how can investors make money off this volatile sector? These were the burning questions The Gold Report took to analysts, money managers and heads of silver mining companies. The answers may surprise you.
In an impromptu poll at The Prospectors & Developers Association of Canada Convention (PDAC) in 2012, attendees were decidedly positive as they cited increased demand for silver from sources such as electronics, solar panels and medical uses, in addition to use as an investment vehicle. One year later, Jeffrey Christian, managing partner of CPM Group and the author of the investing book "Commodities Rising," predicts a 2.8% increase in silver demand on the fabrication front after a 1.2% rise in 2012 when solar panel use of silver actually fell about 25%. "Economic conditions actually may be a bit stronger in the U.S., China and a few other major markets this year than they were last year and solar panel use may stabilize," he said. "The lower silver prices we anticipate would help boost demand." The key sector to watch, he says, is jewelry and silverware, as that is the most price sensitive demand sector and uses more silver than any other segment of the market.
On the investment side, continued political squabbling can have an impact on overall stock prices, but Christian posits that the market is getting tired of politicians playing games and becoming inured to the cacophony. "Investors have heard a steady pounding about the imminent collapse of the U.S. dollar, the Treasury, the euro, the ECB, and the global financial and banking systems since 2008," he said. "We have had some really bad conditions, but the worst predictions have not happened. Investors are realizing the real problems are not the manufactured and overly hyped machinations in Washington, but the inability of government leaders to seriously address the long-term deficit issues. Therefore, they are shifting from investing based on fears of an imminent catastrophic collapse of the global financial system to investing based on the expectation that the next many decades will see sub-par economic growth, sub-par stock market and bond market performance, persistent high unemployment, and massive deficit and debt problems in the industrialized economies."
David Morgan, editor of Silver-Investor.com, explained that investment demand is counterintuitive. The higher the price, the higher the demand. "I am optimistic the price will increase, but it will not be a huge increase. There will be some spikes due to derivative plays, quick buck artists driving the price up randomly as they did in April 2011. Underlying that is solid buying from hedge funds. Buying begets buying and silver is a darling of momentum players." He, too, believes that government crises like the debt ceiling are irrelevant as they are already priced in. "Central banks have one tool, to debase currency. We all know that."
SilverStrategies.com Editor Sean Rakhimov sees industrial demand remaining robust over the next few years. "The cost of the silver portion of the end product is still insignificant relative to the price of the product itself," Rakhimov explains. The exception is the solar panel industry, which accounts for some 130 million ounces (130 Moz) or 15% of the global silver supply. "The solar panel industry is likely to be more materially affected by the rising silver price," Rakhimov explains, "yet, I do not see it being a decisive factor in determining the price of silver. I believe the demand fundamentals for silver will remain favorable for a continued bull market for the duration of this cycle of which we are about half way through."
On the supply side of the equation, silver production is less sensitive to the price of silver than many other metals because it is largely a byproduct. Bob Archer, CEO of Great Panther Silver Ltd. (GPR;TSX; GPL:NYSE.MKT), which generates almost 70% of its revenue from silver and some 20% from gold production, pointed out that as much as 77% of silver produced globally each year comes as a result of mining for other metals. Depending on whether it is coming with gold, copper or zinc, the silver credit can be an afterthought in the decision to go ahead with production. "Often the silver credit is not important. It is more a function of what the primary metal will be," he says.