Commodities | Feb 08 2012
– Silver best performed precious metal so far in 2012
– Market likely to be in surplus this year
– Investment demand seen as key to silver price outlook
– Barclays forecasts an average price for 2012 of US$32.50 per ounce
By Chris Shaw
Silver has been the best performed of the precious metals in 2012, a gain of more than 20% pushing prices back to the levels of last November. The gain continues the price roller coaster silver delivered last year, which Barclays Capital attributed primarily to changes in investment demand. RBS also points to short-covering on Comex as supporting the rally in silver so far this year.
Despite the early 2012 rally, RBS points out the silver price remains more than 30% below its peak from April of last year. This reflects some caution on the part of investors, as evidenced by low investor positioning in the metal relative to previous peaks.
Looking at the remainder of 2012, Barclays expects the silver market will be in surplus, this thanks in large part to record mine supply. This exposes prices to some downside risk, which Barclays expects will be at least partially offset by supportive investor positioning.
This investor positioning weakened in the latter stages of last year to a net supply position, particularly in the silver coin market. This meant speculative interest in Comex silver fell to just 7,000 lots at year's end from around 40,000 last February, while non-commercial positions were less than 10% of the total as at the end of 2011.
This cleaner investment position suggests to Barclays prices can be driven higher from now established floor levels if there is any uptick in investment demand. This leads Barclays to forecast an average silver price in 2012 of US$32.50 per ounce, with scope for prices to recapture the US$40 per ounce mark sometime over the course of the year.
RBS is somewhat cautious on the fundamentals in the silver market, agreeing with Barclays the metal is in a surplus position that is likely to increase even more over the course of this year. The issue with oversupply in silver in particular is if investor attitude changes, there is little to support prices.
As RBS points out, the effective marginal cost of silver production is small relative to current prices for the metal, meaning a mine supply response is unlikely even if prices fall. Price elasticity of scrap supplies is another issue, as environmental legislation in particular means a notable part of recycling will not respond to lower prices.
Finally, RBS notes much of silver consumption is not price elastic, this given the industrial uses of the metal. This means demand is not expected to increase strongly even if the silver price falls.
Factoring all this in, RBS agrees with Barclays that the outlook for silver remains closely linked to the attitude of investors. In coming months this is expected to remain broadly positive given loose monetary policy should feed into gold and silver as perceived inflation hedges, while also boosting investor perception with respect to risk assets in general.
The European sovereign debt crisis should also continue to offer physical investment demand support for silver at least through the rest of this year, comments RBS. But at US$34 per ounce silver is richly priced in the broker's view, this is likely to limit price upside.
While suggesting long silver positions should be maintained and even added to during any noteworthy price corrections, RBS continues to favour platinum and palladium in the precious metals space.
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