At a time when hedge funds are reducing bullish silver bets by the most in two years, analysts predict a rally as manufacturing expands from China to the U.S., boosting demand for the precious metal most used in industry.
Money managers cut wagers by 68 percent in two months as futures tumbled 22 percent, Commodity Futures Trading Commission data show. Prices will rally to average $35.40 an ounce in the fourth quarter, the third-highest on record, according to the median of 11 analyst estimates compiled by Bloomberg. Shares of Fresnillo Plc, the largest producer, will rise 25 percent in the next 12 months, based on the average of seven forecasts.
Silver, the most volatile metal tracked by Bloomberg, rose more than twice as much as gold this year on mounting confidence the global economy will skirt another recession. China’s factory output gained for a fifth month in April and U.S. manufacturing grew at the fastest pace in a year. Industrial demand from solar panels to batteries to film accounts for about 53 percent of consumption, the Washington-based Silver Institute estimates.
“A greater amount of confidence in the global economy generally means higher growth and that means more silver demand,” said David Jollie, an analyst at Mitsui & Co. Precious Metals Inc. in London and the most accurate forecaster in last year’s London Bullion Market Association survey of silver prices. “If you look out beyond the end of the year, you can still see reasons to be bullish.”
The commodity rose 3.4 percent to $28.855 this year on the Comex in New York, compared with a 1.3 percent gain for gold. The Standard & Poor’s GSCI Spot Index of 24 commodities gained 0.2 percent since the start of January and the MSCI All-Country World Index of equities gained 5.5 percent. Treasuries returned 0.6 percent, a Bank of America Corp. index shows.
Demand from the electronics industry will jump 5.5 percent to a record 8,314 metric tons this year, compensating for a 4.4 percent drop in photography to 2,346 tons as consumers switch to digital cameras, according to Morgan Stanley. Total fabrication, which includes applications such as solders and coins, will reach an all-time high of 28,677 tons, the bank estimates.
Investors will probably buy an additional 750 tons through exchange-traded products backed by the metal this year, mostly reversing a 793-ton decline in 2011, Barclays Plc projects. They are holding a total of 17,575.7 tons in ETPs valued at about $16.3 billion, according to data compiled by Bloomberg. That’s 1.6 percent more than at the start of the year.
Glut of Metal
The investment purchases will still leave a surplus estimated at 3,415 tons by Barclays for this year. A glut of metal has been no bar to rallies in the past four years, with prices almost tripling since the end of 2008.
There are signs investment demand is weakening, with sales of U.S. silver coins tumbling 40 percent to the lowest since February last month, data on the U.S. Mint’s website show. Holdings through ETPs declined 1.4 percent since March 7, according to data compiled by Bloomberg.
An economic slowdown may also curb purchases by manufacturers. American employers added 115,000 jobs in April, the fewest in six months, Labor Department figures showed May 4.
Some investors may be deterred by silver’s price swings. The 100-day historical volatility for futures is at 36.2 percent, higher than gold, platinum, palladium and the main industrial metals traded on the London Metal Exchange, data compiled by Bloomberg show.
“For the average individual trader trying to make his way in these markets, trading silver is just a mug’s game,” said Dennis Gartman, the author of the Suffolk, Virginia-based Gartman Letter who has been trading for about 35 years. “The randomness of the movements keeps me on the sidelines.”
Demand also may be weakening in China, the second-biggest user after the U.S., with March imports 36 percent lower than a year earlier, customs data show. That may be in part because of record domestic production, with mine output increasing 11 percent to 3,232 tons last year, almost twice as much as a decade ago, the Silver Institute estimates.
Stockpiles in warehouses monitored by the Comex in New York, which traded a daily average of $9 billion of silver this year, expanded 21 percent since the start of January, bourse data show. Inventories reached 142.1 million ounces (4,421 tons) on May 1, the highest level since September 1997.
Speculators held a net-long position of 10,565 futures and options in the week ended May 1, down from 33,503 at the end of February and the lowest since January, CFTC data show.
Options traders are more bullish, with the three biggest contracts conferring the right to buy metal at prices higher than now, Comex data show. The most widely held gives owners the right to purchase silver at $40 by the end of June.
Fresnillo, based in Mexico City, will report a 10 percent drop in net income to $807.2 million this year, according to the median of five analyst estimates compiled by Bloomberg. That would still be the second-highest profit on record. Its shares fell 12 percent to 1,346 pence in London trading this year and will reach 1,686 pence within 12 months, the forecasts show.
The shares almost doubled since the end of 2009 on optimism another global recession would be avoided. World output shrank 5.2 percent in 2009, the World Bank estimates. While the International Monetary Fund expects a 0.3 percent contraction in the 17-nation euro region’s economy this year, it is projecting world growth of 3.5 percent. The Washington-based group raised its global forecast by 0.2 percentage point on April 17.
China’s Purchasing Managers’ Index rose to 53.3 in April, from 53.1 in March, the statistics bureau and logistics federation reported May 1. A figure above 50 indicates expansion. The Institute for Supply Management’s U.S. factory index climbed to 54.8 last month, the highest since June, the Tempe, Arizona-based group said the same day.
“The long-term bull market is still very strong,” said Charles Morris, who oversees about $2.5 billion at HSBC Global Asset Management in London. “Silver spends more time going nowhere than it does going up, but when it goes up it tends to do it very quickly.”