Silver, the precious metal most used in industry, is attracting investors betting on both faster and slower economic growth as prices extend the longest run of quarterly gains in three decades.
Doubling as a store of value for buyers concerned about the economy and as an industrial material for those bullish on growth, silver is outperforming metals from copper to zinc this year and keeping pace with gold. It will rise as much as 15 percent to $22 an ounce before December, from $19.145 today, according to Daniel Brebner, an analyst at Deutsche Bank AG whose fourth-quarter outlook was accurate to within 0.7 percent.
While the Federal Reserve warned last week that financial conditions are “less supportive” of growth, investors held a record amount of silver in exchange-traded products backed by the metal, Barclays Capital data show. Options giving traders the right to buy the metal at $25 before Nov. 23 are the most widely held on the Comex in New York.
“Silver is really attractive because you have strong investment demand and strong fabrication demand,” said Jeffrey M. Christian, the managing director of CPM Group, a research company in New York. Silver rose 68 percent since he recommended buying the metal in a Bloomberg interview in October 2008. “You buy gold when you think the world is going to hell in a handbasket. You buy copper when the economy is booming. In between those two, if you’re a bit confused, you buy silver.”
The metal, used to create the first telegraph messages, rose 9.5 percent since the end of March, heading for a sixth quarterly advance. That’s the best streak since 11 consecutive quarters through the beginning of 1980, a year after the Hunt brothers tried to corner the market.
While gold reached a record $1,265.30 an ounce on June 21, silver would have to more than double to get to the all-time high of $50.35 reached in New York in 1980. Silver rose 13 percent this year in London, gold added 14 percent and the London Metal Exchange Index of six industrial metals fell 9.2 percent.
Silver will trade as high as $21 by the end of this year, according to the median in a Bloomberg survey of 27 analysts and traders. Open interest in the call options expiring in November to buy at $25 was almost 7,200 contracts June 25. The next biggest positions are the call options for $20 and $30 by the same date, Comex data show.
Higher prices may bolster profit for BHP Billiton Ltd., KGMH Polska Miedz SA and Fresnillo Plc, the biggest producers in an industry forecast by London-based researcher VM Group to mine 22,793 tons this year, worth $10.8 billion at last year’s average price.
“Silver is still below its recent highs and the speculation has not run amuck yet in the precious metals universe,” said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California, who predicted in March last year that silver would reach $20, something it came within 0.8 percent of doing May 13. “If you’re convinced of a precious metals bull market, there’s still time to accumulate silver.”
Investors in exchange-traded products backed by silver held a then record 12,680 metric tons by the end of May, the worst for stocks and commodities in at least 15 months, Barclays Capital estimates. They added another 43 tons to their holdings this month as the MSCI World Index of equities was little changed and the Standard & Poor’s GSCI Index of 24 raw materials gained 3.3 percent.
Half of silver demand, or 435.1 million ounces, goes into industrial applications including electrical conductors, alloys, solar panels and batteries, according to GFMS Ltd., which compiles reports for The Silver Institute, a Washington-based industry group. That compares with 12 million ounces for gold, 3.85 million ounces for platinum and 6.19 million ounces for palladium. Industrial demand for silver will gain 14 percent in 2010, the most since at least 1988, Barclays estimates.
New applications such as plasma screens are compensating for a drop in demand for film, now 9 percent of usage from 24 percent in 2000, data from London-based GFMS show. Eastman Kodak Co., based in Rochester, New York, said last year it would stop making Kodachrome film after more than seven decades.
Solar-panel installations may jump 44 percent this year to about 33 billion watts of capacity, the Brussels-based European Photovoltaic Industry Association forecast in May, enough to supply about 66 million European homes. Crystalline silicon solar panels use as much as 0.12 gram of silver per watt of capacity. The metal accounts for about 35 percent of a silver- oxide battery and as much as 40 grams of silver are used in a 32-inch plasma TV screen, VM Group estimates.
“We’re more surprised that the demand seems to be staying ahead of this economic downturn,” said Frank Barber, vice president of sales and marketing at Glens Falls, New York-based Ames Goldsmith Corp., which supplies components for watch and hearing-aid batteries and buys about 90 million ounces of silver a year. “Probably the biggest jump we’ve seen is in the demand for the metal for photovoltaic systems.”
Investors looking to protect their wealth should choose gold, said Charles Morris, a fund manager overseeing about $2.5 billion at HSBC Global Asset Management’s Absolute Return fund in London. Pete Sorrentino, a fund manager helping to invest $13.1 billion at Huntington Asset Advisors in Cincinnati, said he bought silver in early May and will move that money into gold by the end of July.
“Silver is materially more volatile than gold and it’s less liquid as well so it’s kind of pointless to own it at all unless it’s got some kind of relative value situation, and right now I don’t believe it does,” Morris said. “We live within difficult times, and therefore the best possible investment is high-quality assets. The highest quality asset of all is gold.”
Silver futures traded in New York anticipate prices no higher than $19.795 through 2014.
Group of 20 leaders over the weekend responded to the European debt crisis with deficit-reduction targets and agreed to pursue higher capital requirements for banks once economic recoveries take hold.
Silver hasn’t always protected wealth when economic growth faltered. Gold rose 5.8 percent in 2008 while silver fell 23 percent. That was still better than the 54 percent plunge in copper and oil.
China, the third-biggest silver user behind the U.S. and India, signaled June 19 it will relax the yuan’s peg to the dollar to curb inflation. Copper and other industrial metals rallied last week on speculation that would increase the purchasing power of Chinese importers. The nation’s growth will slow to 10.5 percent this quarter and 9.6 percent in the next three months, compared with 11.9 percent in the first quarter, according to the median of 21 economists surveyed by Bloomberg.
The U.S. will grow 3 percent in the third quarter and 2.8 percent in the period after that, from 3.3 percent this quarter, according to the median estimate of as many as 66 economists. The Federal Reserve said June 23 that household spending is being constrained by unemployment. The European Union pledged $1 trillion in May to ease the region’s budget deficit crisis.
An ounce of gold buys almost 66 ounces of silver. While that’s down from 70 at the beginning of this month, it’s still above the five-year average of 59. The higher the ratio, the cheaper silver is relative to gold.
“Silver is still cheap,” said Gijsbert Groenewegen, a partner in New York at Gold Arrow Capital Management, which manages $600 million. “People say that it’s the poor man’s gold. It will have to catch up.”
The ratio averaged 36 in 1980, when silver jumped to $50.35. Nelson and William Hunt of Dallas were convicted in 1988 of conspiracy for attempting to manipulate prices and were ordered to pay $130 million.
Investors’ demand for silver is also being reflected in equities, with Fresnillo’s 30 percent advance this year the sixth-best performance in London’s FTSE 100 Index. The company, based in Mexico City, will report earnings per share of 54 cents this year, compared with 45 cents last year, according to the mean of three analyst estimates compiled by Bloomberg.
Pan American Silver Corp., the fourth-largest producer, advanced 13 percent in Toronto trading this year. KGHM, which also mines copper, fell 13 percent in Warsaw while BHP Billiton, based in Melbourne, dropped 6.4 percent in London.
Demand for silver, which attracted buying from Warren Buffett’s Berkshire Hathaway Inc. in the 1990s, is also coming in the form of coins. The U.S. Mint sold almost 17.7 million ounces of American Eagle silver coins this year, 28 percent more than a year earlier, according to data on its website.
GoldCore Ltd., a Dublin-based bullion dealer, said second- quarter sales of silver coins, bars and certificates offering ownership of the metal at the Perth Mint rose more than 20 percent from the first quarter.
“The store-of-value component of silver has been a positive,” said Deutsche Bank’s Brebner, the London-based analyst who expects silver to rise as high as $25 next year. “The industrial component has been negative and depressing the performance but we think that’s run its course.”