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LAWRIE WILLIAMS: Silver market in deficit for fifth year – GFMS

London-based metals analysis consultancy GFMS has just released its latest annual Silver Survey on behalf of the Washington DC-based Silver Institute and it would appear to provide ammunition for those who believe silver is currently underpriced vis-à-vis gold.  Perhaps it is coincidental, but the Gold:Silver ratio (GSR) fell below 80 this morning for the first time in weeks.  We have several times put forward the view that the recent high level of the GSR, which recently reached close to 82, provided a strong buying opportunity for silver and that a level of 70 or lower might be more realistic.

The GFMS analysis found that in 2017, for the fifth year in a row, the silver market recorded another deficit - this time of some 26 million ounces (810 tonnes).

One of the principal factors was that mine supply is adjudged as having fallen for the second consecutive year - by 4% in 2017  This follows on from 13 consecutive annual increases prior to 2016. The fall in mined output is partly attributed to years of Capex reductions in combination with supply disruptions, particularly in the Americas. GFMS also reckoned that scrap supply contracted by 1% and, in combination with net-hedging of 1.4 million ounces (44 tonnes), total silver supply was seen as falling by 2% to just under one billion ounces.

Physical demand, though,  is also seen as contracting in 2017 - by 2%.  This was largely attributed to a 27% drop in coin and bar demand for investment. The fall was the second significant decline in a row and the consultancy sees that as mainly driven by robust equity performances across various exchanges globally, and also the perhaps temporary attraction of investment in bitcoin which surged hugely in 2017, but seems to have come to an abrupt halt in the current year as cryptocurrencies plunged by as much as 60% over a very short period of time.   Investors are also adjudged to have opted for used coins as opposed to new ones which hindered new coin sales. However, on the positive demand side, silver used in jewellery, silverware and industrial fabrication are all estimated at recording increases last year, rising by 2%, 12% and 4% respectively.

In particular, silver demand used in photovoltaics (mostly solar panels) recorded another strong year, rising by 19%, driven in particular by strong uptake from Chinese households. Following various years of increased thrifting and substitution pressure, silver used in electrical components, brazing & alloys and other applications also recorded a positive performance last year. Demand from the automotive sector was reportedly strong.

Other factors pointed to in the GFMS analysis were that in spite of lower retail demand, silver ETP investors continued to add a net total of 2.4 million ounces (74 tonnes) to the total outstanding silver ETP stock across the various funds, with silver stored in Switzerland and the U.S. in particular benefiting from the annual rise. On balance, though, total global exchange stocks are seen as rising by 6.8 million ounces (210 tonnes) which was largely a function of lower physical demand in major consuming regions.

Combined, the silver net-balance is seen as a deficit of 35.2 million ounces(1,094 tonnes) representing on average 3% of total annual demand, the lowest since 2005.

There’s enough nervousness in the air to see gold climb through the $1,360 level again although it probably needs to hit $1,365 or higher to call the latest rise a true breakout.  But if it does do so the principal beneficiary may well be silver which has been seriously underperforming its sibling precious metal of late.  Could this be the start of what silver buffs have been predicting in terms of a restting of the price balance with gold?

Of the other main investment options, bitcoin has tanked, and could yet fall further as more and more opposition from governments and central banks to crypto-currencies materializes; equities and bonds are no longer the sure route to investment growth they have been over the past several years, while gold stocks continue to underperform given management’s failings to control costs and debt – although this may be beginning to come right, but perhaps too little too late for the investment community.

What may have gone unnoticed is that gold in particular has outperformed equities so far this year – and where gold goes silver tends to follow.  So far this year the Dow is down and the S&P 500 alos and both are looking potentially vulnerable to further falls.  By contrast the gold price is up around 2% year to date, while silver is still lagging – down 3.5% but perhaps at last beginning to play catch-up.  Gold stocks, as represented by the HUI index, are down a massive 10.8% which shows how strongly out of favour they have become so far this year. (We do anticipate a recovery but this may only be in the medium to long term as the gold stocks in general have a fair way to go in restoring investor confidence.)

But as far as the silver price is concerned the level of the gold price has to be particularly relevant too as the two principal precious metals have usually moved together, with silver tending to outperform gold when the latter is rising and vice versa.  As we see gold continuing to rise this year that colours our views on the likely progress of the GSR (see above). 

Re, gold there is also a considerable amount of geopolitical anxiety as the world awaits the outcome of proposed tit-for-tat tariff barriers between the U.S. and China in particular being raised in response to President Trump’s initiatives, as well as serious concerns about an escalation of conflict in Syria, which could pit the U.S. in direct military conflict with Russia.  Both sides might be willing to trial their latest weaponry against each other in a limited-area conflict to see who might come out on top in a bigger military confrontation. 

President Trump no doubt had the support of his new more hawkish National Security Advisor, John Bolton, in the pre-emptive military action following the disputed alleged chemical weapons attack against the former Syrian rebel stronghold of Douma.  Latest reports coming out of Douma, now that independent reporters are able to access the area, may even suggest that the alleged chemical weapons attack may never have happened at all and that the images of children gasping for breath may have been due to oxygen deprivation as a result of conventional bombing.  Not, perhaps an acceptable situation in its own right, but in the eyes of the world not as heinous as chemicals weapons deployment.  It is difficult to see what the hugely maligned President Assad could have gained through the use of chemical weapons apart from universal condemnation!  Even if this latest reported evidence gains credence it seems unlikely that the U.S., U.K. and France will ever admit this.

Both Russia and Iran appear to be lined up in support of Syria’s President Assad – and all of these seem to be among the U.S. Administration’s list of hostile military powers deserving of a bloody nose – but it might not stop there which is somewhat unnerving and could all be beneficial for gold should matters escalate further.  Modern warfare seems to be as much a matter of propaganda as actual military action but the former can easily degenerate into the latter.

So the latest analysis from GFMS does seem to support the potential advantages of silver as an investment over gold through the remainder of the current year, and perhaps beyond.  Supply/demand fundamentals look positive and the price ratio with gold looks due to come down, while we see the latter’s potential for price growth still looks positive.

18 Apr 2018 | Categories: Gold, Silver

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