This Precious Metal Needs a Silver Bullet
In the past 12 months alone, the benchmark silver-futures contract has declined 27%
Once prized as a precious metal that could be put to practical use, silver is now getting the worst of both worlds.
Like gold, silver has lost its shine among investors who are no longer seeking a shield from market turmoil or a store of value to protect against inflation. Silver’s use as an industrial metal also is on the wane as growth in world economies, particularly China, starts to slow.
“Silver is getting whacked from both sides,” said Ed Meir, a commodity analyst with brokerage INTL FCStone.
It has added up to a bad few months for all things silver.
In the past 12 months alone, the price of the benchmark silver-futures contract has declined 27% to below $15 an ounce, far outpacing the 16% slide in most-active gold and extending a bear market that began in November 2013. From a three-decade high of $48.599 an ounce hit in April 2011, silver has slumped 70%.
Share prices of some silver-mining companies have lost about a quarter of their value this year. Yet production is rising.
And many traders and analysts aren’t optimistic about an upswing. Analysts at Barclays predict silver prices will fall 20% in the coming year. Bearish wagers on the metal have jumped fivefold since May by one measure. Investors are yanking money out of the biggest silver-focused exchange-traded fund at the fastest pace in four years.
Silver’s downfall is emblematic of the challenges investors face across commodities markets, from crude oil to copper and corn. After piling into commodities during boom years fueled by China’s double-digit growth and easing by the world’s major central banks, investors are quickly retreating. The S&P GSCI commodity index tumbled 14% in July, reaching a 13-year low on Monday.
It is a far cry from the years immediately following the financial crisis. Silver soared in 2010, amid fears that the Federal Reserve’s extraordinary stimulus measures would fan runaway inflation. At the same time, the world was coming out of a recession, stoking demand for raw materials.
“Silver can well be described as a hybrid metal—half precious, half industrial,” said Bart Melek, head of commodity strategy at TD Securities in Toronto. In addition to the concerns surrounding China, investors are bracing for the Fed to raise the short-term benchmark interest rate for the first time in nearly a decade. That is likely to be negative for precious metals as the opportunity cost of holding a zero-yielding asset grows, Mr. Melek said.
A rebound in manufacturing activity that relies on silver—or renewed economic worries that send investors flocking to haven assets—could prompt a recovery in silver prices. Retail investors already have gone bargain hunting. In July, sales of silver coins by the U.S. Mint more than doubled from year-ago levels.
On Wednesday, the most-active silver contract, for September delivery, closed roughly flat at $14.553 a troy ounce. The metal is down 26% since first entering a bear market—defined as a 20% fall from a recent high—in 2013.
Silver is called the “poor man’s gold” because its relatively low price attracts individual investors, who often make wagers through shares on exchange-traded funds and other securities. The price of gold on Wednesday was $1,085.60 an ounce for the most-active contract.
The price ratio of gold to silver, a widely watched gauge of the relative value of the two precious metals, is currently 75-to-1, far above the historical average of about 50-to-1 that endured during the four previous decades. In the past, a surge in this ratio has sparked buying, but many investors are steering clear of silver this time around.
From the start of 2015 through July 31, investors yanked more than $50 million from BlackRock Inc.’s $4.8 billion iShares Silver Trust, the biggest exchange-traded fund backed by physical silver, according to fund tracker Morningstar. It was the largest outflow for that period since 2011.
David Miller, chief investment officer at Catalyst Mutual Funds, said he initiated a $1.2 million bet against silver ETFs in recent weeks as the market fell and recently added shorts against silver-mining stocks as well.
Shares of silver miners, including Silver Wheaton Corp., Coeur Mining Inc. and Tahoe Resources Inc. all are down at least 25% so far this year, compared with a 2% gain for the S&P 500 stock index.
“We think demand in China is definitely weakening,” Mr. Miller said. “They can’t keep growing the way they did historically.”
China accounts for about a third of total global industrial demand. Its industrial use of silver rose 3.6% in 2014 to 186 million ounces, but it plunged in areas such as jewelry fabrication, according to the Silver Institute, an industry group.
The sharp decline in Chinese stocks in recent weeks and renewed signs of a slowdown in the world’s second-largest economy suggest China’s silver demand could decline in coming years, investors and traders say.
World-wide, overall silver demand sank 4% last year, according to Silver Institute data. The drop was due largely to sliding investor demand for precious metals, whose appeal has faded amid tepid inflation and steady improvement in the U.S. economy.
“Investors aren’t really expecting inflation,” said Erica Rannestad, a senior analyst at metals research and consulting firm GFMS, a Thomson Reuters unit. “Right now, it’s not important.”
Industrial demand for silver fell 0.5% last year due to declines in Europe and North America. Many factors are behind the drop. The more consumers use digital cameras, the less need there is for film, which contains silver. The growing preference for tablets also hits silver demand because less silver is used to manufacture tablets than standard personal computers. Makers of solar panels are moving away from silver as they seek to cut costs.
Silver output is expanding, putting further downward pressure on prices. Production from mines that primarily focus on extraction of the metal rose 8% last year, bringing global supplies to their highest level since 2010, according to Silver Institute data.