Silver Bear Market Seen Ending on Europe Crisis: Commodities

Silver, the best-performing and most-volatile precious metal of the past year, may rebound from a bear market as investors bet on growth in developing nations and an extended European debt crisis.

The metal may average $38 an ounce this quarter and rise to a record $42 by the final three months of 2012, compared with $30.155 at 5:10 p.m. in London today, according to the median in a Bloomberg survey of 11 analysts. The gains will mean record profit for producers Pan American Silver Corp. (PAA) and Fresnillo Plc (FRES), analyst estimates compiled by Bloomberg show.

China, the biggest emerging-market user, is expanding at more than five times the speed of the U.S., driving consumption of the precious metal most used in industry. Demand is also coming from investors looking for an alternative to cash and gold, which costs about 50 times more than silver. The 30-week correlation coefficient between the two metals is now at 0.82, from as low as 0.47 in 2005, data compiled by Bloomberg show, with a figure of 1 meaning the two move in lockstep.

“Prices now look relatively cheap to where they have been recently,” said David Wilson, an analyst at Societe Generale SA in London and the most accurate silver forecaster tracked by Bloomberg in the two years through June. “The backdrop is still very supportive for gold and we think that silver will leverage off the back of that. Emerging markets are going to be important for demand for sure.”

Solar Panels

Silver slumped as much as 48 percent after reaching a 31- year high of $49.845 in April. Used in everything from jewelry and coins to solar panels and film, the commodity returned more than any other major precious metal over the past year with a gain of 30 percent. Gold rallied 22 percent as the MSCI All- Country World Index of stocks fell 7.3 percent. Treasuries returned 4.8 percent, Bank of America Corp. indexes show.

While silver has swung from losses of 3.2 percent to gains of 103 percent over the past 12 months, exceeding moves in gold, platinum and palladium, it is still on track for its highest- ever annual average.

The metal tumbled 28 percent last month, the biggest drop since 1980, as equities and commodities slumped on signs growth was slowing. Spain, Italy and Greece are among euro-region nations which had their credit ratings cut this year. About $5 trillion was wiped off the value of global stocks and the Standard & Poor’s GSCI gauge of 24 commodities retreated 12 percent, the largest decline in almost three years.

Monetary Fund

Economists tracked by Bloomberg are more bullish. The global economy will expand 2.86 percent next year, accelerating from 2.77 percent in 2011, according to a composite of regional forecasts compiled by Bloomberg. The International Monetary Fund is forecasting world growth of 4 percent next year, driven by a 6.1 percent gain in developing economies.

Industrial and numismatic demand for silver fell almost 11 percent in 2009, Morgan Stanley estimates, during the worst global recession since World War II. Prices still rose 49 percent because consumption was underpinned by investment, with holdings in exchange-traded products backed by the metal jumping 48 percent, data compiled by Bloomberg show. Combined assets in ETPs rose 4.8 percent to 17,515 metric tons since mid-July, equal to almost nine months of mine production, the data show.

That may not be enough to erode a glut. Global supply of silver has exceeded non-investment demand since 2008 and this so-called fundamental surplus will persist until at least 2016, Morgan Stanley predicts. Output from mines will rise 1.4 percent this year, accelerating to 4.5 percent in 2012, says the bank.

‘Very Weak’

“The fundamentals still look very weak,” said Suki Cooper, a commodities analyst at Barclays Capital in New York who expects silver to average $27 in the fourth quarter of next year. “The downside still looks much more vulnerable, given that we’re not seeing the same strength in industrial demand that we have seen previously, and given that mine supply still looks very healthy.”

Silver may also fail to protect investors’ assets should economies tip back into recession. It slumped 24 percent in 2008, the most in almost a quarter century, as gold rose 5.5 percent.

Investors for now are getting more bullish. As well as adding to ETP holdings, they are also buying bullion coins, with the U.S. Mint selling 4.46 million ounces of American Eagles in September, the most since January. Record low interest rates in the U.S. should make holding bullion, which generally earns investors returns only through price gains, more attractive. The U.S. Federal Reserve pledged in August to keep interest rates at a historic low until at least mid-2013 to shore up the recovery.

Futures Trading

The most widely held option on futures gives the owner the right to buy silver at $50 by November, according to data from the Comex exchange in New York. Money managers raised bets on higher prices for the first time in more than a month in the week ended Oct. 11, Commodity Futures Trading Commission data show. The net-long position gained 1.3 percent to 11,573 futures and options contracts.

Pan American Silver, the fourth-largest producer, will report profit of $347.8 million this year, compared with $112.6 million in 2010, according to the mean of four analysts’ estimates compiled by Bloomberg. Shares of the Vancouver-based company slumped 33 percent since the start of January.

Fresnillo, the second-largest producer, will make $911.8 million in 2011, compared with $665.1 million in 2010, the mean of six estimates shows. Shares of the Mexico City-based company dropped 9 percent in London this year.

“I don’t see any sustainable solution for the debt crisis, so investor interest will stay,” said Thorsten Proettel, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany and the fourth-best precious-metals forecaster tracked by Bloomberg over the past two years. “Silver should get support from economic growth in the newly industrialized countries.”

To contact the reporters for this story: Glenys Sim in Singapore at gsim4@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Claudia Carpenter at ccarpenter2@bloomberg.net

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