Silver Watch Not just yet…
Group Economics Macro & Financial Markets Research Georgette Boele, tel,+31 20 6297789
7 May 2015 • • • •
Silver prices are back where they started in 2010 Silver prices are sensitive to higher US rates and a higher dollar… …and are currently tracking gold prices We expect price weakness in the near term and a recovery later in the year
Back where prices started in 2010
buyers may be tempted to buy silver and indirectly this gives
Silver prices are back at 2010 levels. One would wonder if
support.
anything had happened during these last five years. In fact, it has. The significant price rally in 2010 and 2011 (driven by US
Why has silver tracked gold prices?
dollar weakness) came to an abrupt standstill in April 2011.
Precious metals that have a considerable demand component
This was followed by a dramatic crash in prices, which took
in coins and jewellery have tracked gold prices. Gold prices
around 3.5 years to materialise. The recovery in the US dollar,
peaked in September 2011, and the subsequent fall in prices
lower gold prices and changes in the demand and supply
also dragged down other precious metal prices. Silver prices
outlook are mainly responsible for this price movement.
lost more than gold prices, because the market was more leveraged and less liquid. Therefore, the movement to the
Back where it started in 2010
upside and downside were more significant.
In USD per ounce
Does silver lack character? 60
Yes and no. Yes, because silver prices are directly affected by
50
developments in gold prices. If gold prices sell off, so do silver
40
prices. The main reason behind this is that they often have a
30
common driver. For example, higher US rates and dollar will
20
generally result in investors selling precious metal positions
10
with similar characteristics. No, in the sense that silver also has its own character, but it rarely shows it. In the significant
0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Silver price
price rally in 2011, silver prices went from strength to strength because the industrial demand outlook brightened. Industrial demand for gold is rather small. Therefore, silver prices
Source: Bloomberg
Why are silver prices sensitive to US dollar and US rates? Investors have a wide variety of instruments to invest in. Since 2004, exchange traded products have opened precious metal markets to a wider public, who have eagerly taken this opportunity. If interest rates rise, such as US rates, it becomes more expensive to finance projects. In addition, higher interest rates make zero or low yielding investments, such as silver, unattractive. Lastly, higher US rates are supportive for the dollar as long as the economy is strong. If the US dollar rises, the price of silver denominated in dollars goes down. Therefore, silver prices have a tendency to weaken if the US dollar and US rates rise. However, prices can also be denominated in other currencies such as the Indian rupee. If the silver price in Indian rupee drops substantially, important
strongly outperformed gold prices back then. What will happen going forward? Above ground stocks for silver are ample (in the form of jewellery). We expect supply to grow at a modest rate. Not only mine supply but also indirect supply from investors who sell their positions in an environment of higher US rates and a higher dollar. However, we expect demand, especially industrial demand, also to pick up. In the coming time, supply will likely increase at a faster pace than demand. Therefore, we still expect lower silver prices in the near term. However, we expect a pick-up in silver prices later in the year as industrial demand will more than compensate for investor position liquidation. As a result, we expect silver will start to deviate from gold prices and show its own industrial character again. Our forecast for the end of June is USD 15 per ounce and USD 16 per ounce at the end of this year.
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Silver Watch - Not just yet窶ｦ
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