The silver price has risen more than 25% so far this year as against gold's 13%, but can such a solid performance continue - or even be exceeded in the months ahead.
Author: Lawrence Williams
Posted: Tuesday , 28 Feb 2012
LONDON (MINEWEB) -
Silver has been about the best performing metal commodity so far this year, currently fetching more than 25% more than it did at the close of 2011 - not a bad performance in a short couple of months! However the big question for silver investors is whether its current rate of progress is sustainable - and depending on who you listen to for advice it's a tough call.
Firstly, on a pure supply and demand basis, the position is controversial. On the face of things there is plenty of potential silver supply out there, but even so the fundamentals are basically unchanged from this time a year ago when silver was roaring up to new highs, before it came crashing back down on what has to have been a very nasty bit of market manipulation presumably by those who could have lost a fortune in over-large short positions. The silver commodity market is small enough to be manipulated in this way by those with big enough pockets which is why it can be such a dangerous metal in which to invest.
Those looking at the industrial and jewellery demand fundamentals, but perhaps ignoring much of the ongoing investment demand, though, will tell you that silver is in substantial oversupply and prices are not sustainable, but perhaps they are missing the point.
In talking to a former top mining analyst at the end of last week his opinion of markets is, to say the least, interesting. For bulk commodities and other metals and minerals with substantial markets like the major base metals, fundamental analysis is indeed a very valuable tool for estimating price patterns - even so it's remarkable how often such analyses are ultimately proved incorrect - but for lesser-traded commodities and junior and mid-tier mining stocks it tends to be sentiment and perception which moves the markets, not necessarily fundamentals related at all. And silver is one of the best examples of this.
For the most part, the silver price tends to move with the gold price - although the real markets for the two are substantially different. While some consider silver to be a monetary metal, in reality it is not - it is primarily an industrial metal, but with substantial jewellery and hard-money investment overtones largely for historical reasons. Also, unlike gold, most production is as a byproduct of other metalliferous mining operations so production as a single metal is not as discernible as that for gold - and this works both ways in terms of its industrial marketplace. In a weak economy, when demand for industrial metals falters, silver included, production may also falter given its by-product status. And, along with many industrial metals, declining grades are also having an impact on basic supply.
But, in moving along with the gold price, the more volatile silver as a generality, exceeds gold's percentage gains on the upside and similarly falls faster on the way down. It is thus a dangerous metal to gamble in!
In a perceived gold bull market, which we have at present with many observers seeing the yellow metal perhaps hit the $2,000 mark this year, silver could also be set for a good rise - and on the basis of $2,000 gold silver may well be set to hit $40 or more in 2012 assuming the current gold:silver ratio (GSR) is maintained at around the current 50:1 level or falls further.
There are those, though, who say that the GSR will eventually revert to its historic level of around 16:1, although I am not a believer that this is likely in the foreseeable future in that the true monetary reserve element in the price is no longer with us. Even so, given that silver has gained a little momentum in recent weeks, if this is sustained then the GSR could well move below the 50 level giving an even greater upside to the silver price in the short term.
As we noted above, it is perception and sentiment, along with gold price performance, which may well set the mark for silver in the months ahead. As gold rises, if indeed it continues to do so, then there is a good chance that silver will exceed gold's rise in percentage terms, particularly as buyers in countries like India may be beginning to find the gold price too high and are switching some of their precious metals purchases to the much less costly option. Silver ETFs too seem to be seeing a bit of a pick-up...Read more @Source
