The silver market in 2013

Yesterday Thomson Reuters GFMS released their latest report on the silver market. We take a look at it and assess what it means for the silver price.

There are several factors, some positive and others negative, that will affect the price of silver going forward.

First up, let’s have the not-so-good news facing the silver price.

In 2013, total supply of silver is expected to climb by around 0.7%, much of this is thanks to the 7% or 28 Moz (million ounce) increase in mine supply but offset by the 8% decline in scrap silver supply.

This leaves the silver market in a residual surplus of 287 Moz (forecast for 2013).

Of course, the other glaringly obvious negative issue for silver is its role as a safe haven during times of economic turmoil, inflation etc. With rumours that everything will suddenly be fixed where does this leave silver along with its gold friend? Well, as we describe below, silver investors don’t seem so convinced that all is well and that they can turn their backs on the safe haven just yet. Added to this silver is an increasingly industrial metal, perfect for a global recovery.

Gold and silver

So far in 2013, silver has suffered more than gold having fallen by 29% so far to gold’s 22%. Currently the gold silver ratio is around 60 and has averaged 59.4 in 2013. Whilst we frequently refer to the historical average being 15:1, 60:1 has in fact been the average since 2000.

The current silver to gold price ratio favours buying silver. This hasn’t gone unnoticed. Eric Sprott recently reported that coin and bullion sellers are seeing equal amounts of capital being spent on gold and silver, meaning 60 times more ounces of silver being purchased than gold.

In the past three years the ratio has been around 55 therefore the currently higher ratio is very much seen as a positive by the authors of the report who suggest that this may set the metal up for outperforming the gold price in the coming months.

Speaking of outperforming gold, 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.

Silver investment

In the last ten years demand for silver as an investment has climbed from accounting for just 4% of total demand to 24%.

Whilst silver might appear to be a better buy than gold, it is in fact rarer than the yellow metal when it comes to investment purposes. Eric Sprott believes the ratio of investment grade silver to investment grade gold to be 3:1. Sprott calculates that there is in fact only 120 million ounces of gold and 350 million ounces of silver available for investment.

Whilst gold ETF outflows are regularly blamed for the fall in the gold price. The same cannot be said for silver ETFS and the silver price – so far in 2013 silver ETF holdings have risen throughout the year reaching a high of 650 Moz.

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.

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