Positives and negatives in CPM silver report
by Lawrence Williams, MineWeb We have already seen the major specialist consultancies’ reports on the gold sector in 2014 with price predictions for the current year and beyond – indeed one of these, GFMS, has already issued a Q1 update See: GFMS Q1 update confirms China as world No. 1 gold consumer and now it is the turn for silver with the U.S. CPM Group putting out its 230 page 2015 Silver Yearbook with its wealth of data on last year’s global supply and demand and some thoughts on how the silver price will perform this year. Given that silver appears to be inextricably linked to gold as an investment, despite the prime demand for it as an industrial metal rather than a monetary one, it is hardly surprising that CPM views the path of the silver price this year as being somewhat similar to its predictions for gold See: Further downside on gold prices limited – CPM . Thus it sees some weakness in the months ahead, but with the silver price consolidating later in the year. However silver is more volatile than gold so we could see larger percentage falls on the downside, but a bigger rise once a recovery does begin to set in. GOLD/SILVER RATIO RELEVANCE The report does take a little time to discuss the relevance of the Gold:Silver ratio and concludes that reliance on this is not particularly valuable. The so-called historic 16:1 ratio, set by Isaac Newton in the early 1700s when silver was very much a monetary metal alongside gold may no longer be of any import, although some investors do believe that it should be. CPM sees no scientific or quantitatively supportable basis for such a belief that the 16:1, or any other specific ratio, should be of particular relevance, although it recognises that there are many who believe strongly that they should. But with the ratio varying from around 17 to 97 over the past few decades this would seem to make it a poor indicator of what prices for the two metals should be. In truth one can put almost any spin one wants on reports of this type with the resultant media coverage tending to express the views of the writer – with both negative and positive takes on the findings. Hence the Bloomberg article on the report we published on Mineweb yesterday which seemed to emphasise the negative aspects – See: Silver set for longest slump in 24 years – CPM. On the other hand we might wish to emphasise some of the more positive aspects, although the CPM report is perhaps slightly more negative for the silver investor overall, but does hold out some plus points too. The main trouble with such a treatise is that the casual reader can get totally blinded by the huge amount of data presented in statistical tables and charts . This is ideal for those who have the time and the inclination to check these out in detail but, as is always the case there are many factors noted, but perhaps obscured by the wealth of data, which could be seen as having different long term interpretations for where the market is headed. Thus CPM notes that it does expects silver prices to consolidate during 2015, after ending 2014 at $15.60, down 19%. It goes on to say that the decline in prices during 2014 was a continuation of a trend that has been in place since 2011. Silver prices declined primarily due to shorter term investors who moved their funds out of not only silver but much of the commodities complex. The report also notes’ though, that long term investors have been taking the opposite view, using the lower silver prices to build up their holdings. Even so, silver prices at the end of 2014 were the lowest that they had been since 2010. On an annual average basis prices slipped to $19.09, down 4.3% from 2013 but still the sixth highest annual silver price on record. INVESTOR DEMAND In its own brief release on the Silver Yearbook, CPM comments that investor demand plays a very important role in determining the direction of silver prices. On a net basis it sees investment demand as having fallen to 131.6 million ounces in 2014, down 12.6% from 2013. As noted above longer term investors cautiously loaded up on silver in light of falling prices, shorter term investors were primarily sellers, pushing prices lower and reallocating their monies to other parts of the market where they believed they could make quicker or better returns. These longer term investors are seen as having been buyers based on their longer term economic and political concerns. But they have also been cautious buyers as they remained concerned about the ongoing decline in price. But CPM feels they will remain committed to buying and holding silver against economic and political concerns, but may be holding off to see if they can get silver at a better price if they waited longer to buy. Given rising refined silver supply, CPM reckons that both short term and long term investors need to continue buying historically large volumes of silver in order to sustain any increase in silver prices from recent levels. Silver supplies have been on the rise, driven primarily by mine supply. In 2014 and early 2015 sales by shorter term investors have been being offset for the most part by purchases made by longer term investors, but it most likely will require buying by both types of investors to have a significantly stronger impact on the price. Net investment demand during 2015 is forecast to decline further, meanwhile, as long-term investors wait for confirmation that prices have stopped falling. Even so, it is expected to remain at historically high levels, possibly around 102.9 million ounces. FABRICATION DEMAND Global silver fabrication demand continued to rise last year to 865.3 million ounces, up 3.5% from 2013. This has been rising at a healthy pace since 2013, largely driven by an increase in silver jewellery and silverware demand but also by an increase in demand from electronics and solar panels. The solar panel industry in particular is seen as becoming increasingly important. Even though the amount of silver consumed by this industry is small relative to demand from the jewellery and electronics sectors it is still growing at a rapid pace. If expectations for 2015 demand from this sector are realised solar panels may become the third largest source of fabrication demand, pushing the photography sector, which has been in a declining trend for more than a decade, into fourth position. SUPPLY CPM calculates that total refined silver supply rose to 996.9 million ounces in 2014, up 1% from 2013. This increase during 2014 was driven primarily by an increase in mine supply, with secondary supply declining for the third consecutive year. The decline in secondary supply was more than offset by an increase in mine supply. Mine supply was driven higher by an increase in output from both primary silver mines as well as byproduct silver output from base metal and gold mines. While declines in silver prices have severely eroded the profit margins of silver mining companies for the past couple of years, there has not yet been any significant cutback in global mine supplies of silver to date. In part this is because around 75% of silver mine supply comes as byproduct at producers who are not excessively concerned about the price of silver and in part because there has been an increase in the number and total ounces produced from primary mines which came on stream in recent years in response to the strength in prices during the 2000s. Overall CPM sees bullion supply as having exceeded demand by some 102.9 million ounces, and without significant mine closures there is perhaps little reason to see this changing much in 2015, although secondary supply could continue to diminish given low prices. With silver prices seeming inextricably connected to gold, and the current U.S. data driven fluctuations in the latter, the timing of a U.S. Fed interest rate increase becomes relevant although the implication in the CPM report is that it should not be. It does not expect the Fed will raise interest rates before its September 2015 meeting and that it could potentially delay raising rates into 2016. When it does raise rates the increase may be small and gradual, with limited negative impact on real economic growth. However, on the positive front, the report says an interest rate rise could also limit the rate of growth in the stock market which could push a few investment dollars toward the silver market, which has declined significantly from its highs in 2011. Given the relatively small size of the silver market, CPM reckons, it only takes a few dollars to push prices higher. More detail on the CPM 2015 Silver Yearbook can be found on www.cpm-group.com.