Silver Supply Trouble Shows Why Rally Momentum Is Building

Updated on
  • Silver mine output seen falling for first time since 2011: CPM
  • Investor holdings in silver ETFs rise at triple gold's pace

More good news for silver bulls: there’s supply trouble brewing.

Output from mines will fall for the first time since 2011, while demand for the metal in uses including industrial products and jewelry is heading for a fourth straight gain, supporting prices, according to CPM Group. The market is entering what is “likely to be a pivotal year,” the New York-based researcher said in its “Silver Yearbook 2016.”

Production is declining just as signs of stabilization in China’s economy fuel optimism for stronger global demand, helping drive a 24 percent rally in silver this year through Monday that topped gold’s performance. Both metals are benefiting from increased expectations that the Federal Reserve will be slow to raise interest rates this year amid concerns that slowing global growth will spill over into the U.S. That’s boosted demand for gold and silver as stores of value, after prices for each slid for three straight years through 2015.

“The sentiment in precious metals broadly has improved, particularly since the Fed went fairly dovish in March,” Bart Melek, the head of commodity strategy at TD Securities in Toronto, and the third-most accurate silver forecaster tracked by Bloomberg in the first quarter, said in a telephone interview. “What also has changed is that we’re looking at more stable economic numbers for China, so we’re no longer really worried about a collapse there.”

Output will drop 2.4 percent to 784.8 million ounces in 2016, from a year earlier, CPM said in its Silver Yearbook. Fabrication demand including jewelry, electronics, and solar panels, will rise 1.6 percent to 889.7 million ounces, it said. Secondary supply, including scrap and melted coins, will drop 1 percent to 203 million ounces, it said.

Reassessing Outlook

The change in investor sentiment propelled silver back to a bull market this month, helping convince Rob Chang, the head of metals and mining in Canada for broker Cantor Fitzgerald, that it’s time to review his outlook and price target. Chang was the most accurate silver forecaster tracked by Bloomberg in the first quarter.

Holdings in exchange-traded funds backed by silver surged more than 1,132 metric tons this year, almost quadruple the volume for the increase in gold, and silver has traded at the most expensive relative to gold since October. Money managers boosted their net-long positions in the week ended April 19 to the highest on record.

Aggregate futures trading jumped to 205,423 contracts on April 21, more than triple the average in the past year.

“You could see there’s a lot of new money flying in,” said Tai Wong, the director of commodity products trading at BMO Capital Markets in New York. “It’s just folks getting on the bandwagon.”

Daniela Corsini, a Milan-based analyst at Intesa Sanpaolo SpA and the second-most accurate silver forecaster tracked by Bloomberg, agrees on the role momentum has played in this month’s 10 percent price gain in the metal.

“While the initial stage of the price increase has been driven by investors who correctly reacted to improved fundamentals, namely signals of recovering industrial demand in Asia, upward pressures during the last week has been mainly driven by speculative flows,” Corsini said in an e-mail.

CPM wasn’t the first to flag the decline in output. In December, Societe Generale said mine production will drop to 23,900 metric tons (768.4 million ounces) in 2016, from 25,800 tons a year earlier, cutting total supply, which includes old scrap.

“I do think the rally is sustainable,”  Cantor Fitzgerald’s Chang said, referring to silver prices. “We believe that signs of China’s economy stabilizing is having an impact. We believe there is more upside.”

More-expensive silver may later encourage investors to sell, helping boost supply available to fabricators, CPM said.

Silver futures for July delivery fell 0.4 percent to $16.99 an ounce at 8:50 a.m. on the Comex in New York.