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LAWRIE WILLIAMS: Will falling Chinese imports put the brakes on rising silver price?

Germany’s Commerzbank analysts commented last week that according to data from the customs authorities, China imported “only” 251 tons of silver in August. Although this was 16% up on the previous month, it was 29% down on August 2015. The analysts also estimated that Chinese silver imports have totalled 1,920 tons since the beginning of the year, which puts them just shy of 7% below the same period last year. After getting off to a strong start to the year, Chinese silver imports have seen their dynamism decline almost continuously. As such, the analysts concluded, the fall in Chinese imports is likely to put the brakes on the silver price rise.

We would tend to disagree, taking silver’s more valuable sibling as a guide.  Chinese gold demand so far this year, by all accounts, has been extremely weak following a record 2015, yet over this period of apparent weakness, the gold price has soared – although not as much as silver has done.  In our view supply and demand fundamentals tend to have little to do with the silver price – at least in the short to medium term.  It’s all about the gold price.  When gold is strong, silver tends to be even stronger as we have seen this year.  When the gold price stutters, silver slips back more.  It may not be logical given the big global industrial demand for silver which should even out price rises and falls, but it’s the precious metals markets in general, and the gold market in particular, which tend to move the silver price.  This somewhat illogical volatility is why traders refer to silver as the ‘devil’s metal’.

There is always considerable argument as to whether silver supply is in surplus or deficit.  According to the big analytical consultancies silver supply is probably in deficit, but as long as the big silver ETFs hold enormous inventories of the metal this may well be immaterial.  One only has to look at platinum and palladium – the other industrial precious metals – to see this effect.  A couple of years ago a prolonged strike affecting many of the world’s largest platinum mines had investors licking their lips and climbing in to the pgms.  This big hole in mine supply was bound to lead to prices soaring.  It didn’t and investors got their fingers burnt.  The users held large stocks against such an eventuality and if these were run down there would be plenty of available supply from the big investment holdings which could be drawn upon to meet demand.  We suspect this is the case with silver as far as supply/demand dynamics are concerned.

25 Sep 2016 | Categories: Gold, Silver

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