Short-term Investors Killed the Silver Price: CPM Group

Released yesterday, CPM Group’s Silver Yearbook 2014 calls for an average 2014 silver price of $20.37 per ounce. That’s 23.8 percent lower than 2013′s average of $23.75 and significantly down from the 2012 average of $31.17.

It’s not, however, too far off from what many firms predicted at the beginning of the year; it’s also in line with CPM’s October 2013 statement that silver prices will “consolidat[e] through 2016,” finding support “at an average annual price no lower than $18 an ounce” prior to that.

But why doesn’t CPM think prices will improve sooner? And what supply and demand factors does the firm believe support its outlook? Here’s a brief overview of the answers to those questions.

What went wrong in 2013?

As many silver market participants are no doubt aware, the white metal earned the distinction of being 2013′s worst-performing metal. That’s largely because midway through April the precious metal plunged from over $27 to about $23 following violent action in the gold market. Many believe that was caused by investor panic at the potential sale of Cypriot gold reserves.

While that explains the initial crash, it doesn’t shed any light on why silver prices didn’t recover later in the year — or on why they haven’t risen this year. Addressing that issue, CPM notes that shorter-term investors “disillusioned by the inability of silver to rise strongly following the highs reached in 2011″ are “primarily responsible” for the metal’s sustained weakness. Why? Because they’ve moved “their funds into other asset classes like equities and real estate that [are] perceived as providing better profit opportunities.”

Poor demand prospects ahead — and behind

Unsurprisingly, that lack of confidence from short-term investors dealt a significant blow to silver demand in 2013. Specifically, on a net basis, investment demand sank 42 percent, hitting 105.3 million ounces, its lowest level since 2008. And, states CPM, don’t expect improvement this year — the firm sees net investment demand for silver falling to 86.9 million ounces in 2014.

On a more positive note, silver fabrication demand rose 6.3 percent last year, hitting 865.8 million ounces, its highest point since 2007. That rise was largely due to “higher demand for jewelry and silverware and from silver’s use in solar technology,” as per the report. In addition, CPM notes, “[d]emand for silver also rose from chemical catalysts, brazing alloys, and biocides,” helping to offset weaker demand from photography and electronics.

Looking at 2014, CPM sees silver demand from electronics and batteries increasing 1.5 percent from the 2013 amount, reaching a record high of 221.7 million ounces in 2014; meanwhile, demand for silver in catalysts should rise to 21.1 million ounces.

Supply to perk up in 2014

Total refined silver supply sank 2.4 percent in 2013, reaching 971 million ounces, according to CPM. That’s primarily because secondary supply declined by 19 percent on the back of lower silver prices, while mine production rose just 4.1 percent from 2012, hitting 741 million ounces.

Most of that mined silver came from top producers Mexico, China and Peru. Of those, “Mexico registered the highest level of growth among all producers during 2013, with output rising 9.6 million ounces from the previous year. This increase in output accounted for 32.7% of the total increase in global silver mine supply,” CPM states. Canada and Russia, however, recorded declines in silver production.

In terms of what’s in store for 2014, CPM said silver supply should reach 977.6 million ounces, with mine supply rising further as secondary supply again declines. Interestingly, “[p]rimary silver mines are expected to make a greater contribution to silver production in the years going forward.”

Investor takeaway

Statistics are all well and good, but what’s an investor to do with CPM’s information?

At least to start with, it might be a good idea to keep in mind the firm’s assessment of the short-term investors who’ve been selling their silver. CPM describes their decision to sell as “unfortunate … because there are many economic, political, and financial problems still at large in the world, and they are likely to negatively affect stocks, bonds, and other traditional investments.” As a result, “[b]uying and holding silver as partial insurance and protection against these hostile developments still makes sense, and represents part of a sound investment strategy.”

The implication, then, is that investors should think of silver as a long-term investment. That means buying when prices for the metal are low, not shying away; indeed, states CPM, last year longer-term investors did exactly that, treating the weakness in silver prices as a buying opportunity. If the firm is correct and we’re due for another few years of price consolidation, opportunities are likely to be rife for exactly that type of purchasing.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

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