Price of Silver Benefiting From Industrial Demand, Cost-Cutting

The massive demand for silver coins that caused an unprecedented supply squeeze in the latter half of 2015 appears to have carried over into the New Year.

First day sales of American Eagle silver bullion coins, administered by the US Mint on Monday, hit almost 2.76 million ounces (Moz). As reported by Reuters, that is roughly half of the 5.53Moz of the very same coin sold in all of January 2015.

In total, the US Mint sold 47 million American Eagle silver coins in 2015, up almost 7% from the previous year’s record high of 44 006 000 coins. And as the spot price of silver slipped to six-year lows, at below $14/oz, demand for silver coins also hit unprecedented levels elsewhere. In Australia, the Perth Mint reported a 53.2% annual increase in silver sales to almost 11.6Moz in 2015. Silver Maple Leaf Coins, sold by the Royal Canadian Mint rose by 76% from the third quarter of 2014 to that of 2015.

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According to research by Smaugld, neither American nor Canadian mining production is sufficient to meet the demand for silver coins in each country. An interim report by The Silver Institute expected the silver market to be in deficit for the third consecutive year in 2015, registering a shortfall of 57.7Moz. “When the market experiences an annual shortfall from mine supply, users must drawdown on above ground stocks, thereby tightening available supply,” the industry association said.

Capital Economics expects cost cutting, in response to weak prices, across the industrial and precious metal industries to reduce silver output by 3% this year. “We are already anticipating that over 6.3Moz per year could be lost as a result of the closures recently announced by Glencore and BHP Billiton in Chile and Australia,” said commodities economist Simona Gambarini.

According to her, tightening supply coupled with recoveries in global industrial production and the gold price should see the price of silver outperform that of gold this year.

“While we have long argued that China, which accounts for over 30% of silver demand for industrial uses, is experiencing a structural slowdown in investment, we think much of the early-2015 drop-off in growth was driven by cyclical factors, such as tighter fiscal and monetary policy, which have since been reversed,” she said. The recovery in industrial production is only expected to translate into higher demand for silver in the second half of 2016.

Gambarini also said that silver’s prospects are tied to that of gold and that the price of gold, currently trading around the $1,100/oz mark would recover to $1,250/oz by year end “driven by a revival of demand for inflation hedges and safe havens, and by increased buying from emerging economies”.

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Capital Economics too has considered the impact of tighter US monetary policy and renewed dollar strength on the prices of both precious metals. Having already lowered its end of year gold forecast to $1,250/oz from $1,400/oz, Gambarini said “We are lowering our end-2016 forecast for silver to $16.5/oz, from $20/oz previously, to give a greater weight to persistent headwinds we expect from tightening US monetary policy and from further dollar strength”.

Despite leaving its forecast for silver unchanged, ABN Amro appeared more cautious, forecasting an end of year price of $15/oz. “We still expect price weakness in Q1 [the first quarter] followed by a recovery afterwards because of a pick-up in industrial demand,” Georgette Boele, co-ordinator of FX & precious metal strategy said.