Is the Silver Surge Sustainable?

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"There does seem to be some momentum building in the silver price again and, given a relatively orderly market, there is no reason for silver not to continue shining, provided gold remains firm to rising."

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?

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. 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 jewelry 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 that 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 jewelry 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/ounce (oz) 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/oz 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 pickup.

On the other hand, there will be a number of speculators who were heavily burnt by the manipulated crash in the silver price last April/May and may be wary of trying again. But with silver imports into both India and China expected to rise sharply this year, the momentum in the silver price could well build sharply again.

While the old primary industrial use for silver in photography has diminished drastically, although still a major market, this is being replaced by a number of other industrial uses, notably in electronics and in the medical sector, where it is a highly effective germicide. Some of the modern uses are less recyclable than the photographic usage they are replacing. If the strong investment demand continues then the true silver supply/demand balance will remain tight which bodes well for the metal on the pricing front.

But, the shadow of market manipulation will continue to overhang. In recent memory silver has been hugely manipulated upward—by the Hunt Brothers back in 1980, which led to a still-record high price for the metal before it came crashing down. On the other side, last year huge momentum in the silver price built up at the beginning of the year, with prices soaring until a huge paper sale of silver when markets were closed brought it crashing down. While the upside momentum at the time had perhaps gone too far and a correction may well have been due, certainly not one of that magnitude ensued. That still very recent collapse will certainly deter some potential silver investors from climbing back into the market for the moment at least.

But there does seem to be some momentum building in the silver price again and, given a relatively orderly market, there is no reason for silver not to continue shining, provided gold remains firm to rising. But there does not seem to be a likelihood that the kind of advance, hugely in advance of that in the gold price in percentage terms seen just a year ago, will reoccur in the short term. Silver still looks to be a good investment choice in the writer's mind, but, as is usually the case, some of the wilder advances predicted by some silver bulls may still be some way off.

Lawrence Williams, Mineweb

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