Jon Nadler, Senior Metals Analyst, Kitco Bullion Dealers, recently talked about the outlook for silver at the San Francisco Hard Assets Investment Conference.
Mr. Nadler has a 33-year career in the precious metals market and its physical investment products. He established and managed several successful retail investment precious metals operations. Mr. Nadler is valued as a speaker and educator for his expertise in consumer education on precious metals. His gold market commentaries are quoted on a daily basis by leading global financial media houses making him the most frequently quoted precious metals analyst on the Internet.
Mr. Nadler starts out with a cautionary note, “If you’re in a position to have established your core, long term gold position, which I recommend you do, regardless of your outlook, then you can consider other metals.” His preference, after gold, is the platinum group metals.
There has been a lot of hype around silver. True to his title as an analyst, Mr. Nadler says he approaches the topic with “lots of fundamentals, facts and figures” to see if there’s some merit to some of the claims that are being made.
The Facts and Figures
The total aggregate supply of silver last year reached 35,000 tonnes (1.1 billion ounces). That constituted a record volume of supply. Mr. Nadler mentions a 4% increase in total silver supply is expected for the current year.
The largest increase in total supply last year came from a 4% increase in mine production (an estimated 21,000 tonnes). China was one of the biggest producers showing a gain of 8% in output, which made them the third largest country for global mine production of silver.
If you tally the top 30 mine producers world wide, the average cash cost is just under $5.20 an ounce. “These costs have nearly doubled from just 5 years ago; they started to show a tendency to flatten out and even decline in recent quarters,” says Mr. Nadler. Mine production accounts for nearly 70% of the silver coming to market.
Next to mines, the high price of silver brought out quite a bit of scrap. Old jewelry, silverware, photographic material, and electronics accounted for 10,000 tonnes of silver brought to market last year. Consumers in India and the Middle East took advantage of high silver prices by selling significant tonnage of scrap to refiners. Overall, scrap supply was up 9% from 2009.
Silver sales by governments are expected to remain at extremely low levels. In general, silver stockpiles have been dwindling since the early 80s. This reflects the diminishing monetary role of silver in the modern global system. “Silver is not money,” points out Mr. Nadler.
The world central banks have gone from hoarding roughly 12,000 tonnes 4 years ago to just 1600 tonnes at present. Mr. Nadler mentions that the U.S., Pakistan, Germany and Mexico account for virtually all of the official silver held by central banks.
Discussing the volatile nature of commodities, Mr. Nadler quotes analysts from Germany’s Commerzbank as saying, “silver is not suited as a store of value and it is behaving more like an industrial metal.”
Supply and Demand
Demand for silver has been decreasing over the past 2 years and reached a 17 year low. The most notable decline in silver demand came from the still shrinking photographic applications sector.
Electronics and photovoltaic account for the biggest demand for silver. However, as Mr. Nadler mentions, “Demand in these areas has declined as a result of the European debt situation and near stalling of the earth’s economy.”
According to Mr. Nadler, there is a current surplus of 7,400 tonnes. So, we can apply the basic laws of supply and demand to see that a decrease in demand and an increase in supply will generate a decrease in price.
You may feel optimistic when Mr. Nadler mentions there is increasing demand for silver is investments; however, he states the vast majority of the demand for silver in this investment category can be attributed to ETFs. Exchange traded funds consumed 150 million ounces in 2009 or 21% of the fresh mine supply. Mr. Nadler is quick to point out that this isn’t really that much. He makes a comparison, “Warren Buffet, when he did his silver play, bought 138 million ounces all for his portfolio. So, it sounds like a lot, but in a small market, one big investor could absorb that.”
Mr. Nadler looks to the last 10 months as evidence that investment demand is highly cyclical, fickle and transitory in nature. He says of silver prices, “You saw a virtual doubling in prices between February and May and the subsequent implosion to $33. This brought up discussions about silver bear markets and popped bubbles.”
He concludes his point saying, “As with the case with gold, the period from 2008 to now shows that this is what happens when hedge funds and momentum funds play and their affect in the market is unmistakable.”
Mr. Nadler again turns to the figures stating, “If you take the last 2 decades, silver’s return on an annualized basis is 9.5%. It was higher than gold, but it came with a higher level of risk. If you take the quarter century period from 1984 to 2009, silver’s return barely matched what gold offered, but its risk remained high.”
So, the history doesn’t look good and Mr. Nadler turns to Wang Tao, technical analyst with Thomson Reuters for thoughts on the future. Mr. Tao sees silver as having moved into a long term bear cycle. Mr. Nadler quotes Mr. Tao as saying, “the white metal is riding on a feared downward wave, which is expected to travel to between $16.35 an ounce to possibly $22.” The Standard Bank of Africa mirrors this when Mr. Nadler repeats that they have “serious doubts on silver’s prospects.”
“Those are the facts and figures,” concludes Mr. Nadler. “As I said, if you do this, do it in addition to a core position in gold.”