Silver prices today are certainly taking a beating in commodities markets, but a broader silver price forecast shows that a major price upswing could very well be on its way.
The price of silver is down more than seven percent in 2015. But will this downward trend continue? Let’s examine the basic market conditions in which the grey metal finds itself, and then why this trend is likely to reverse itself by the end of the year.
Are Silver Prices About to Hit $30.00?
Just as with gold, silver has been bottoming due to the U.S. dollar’s rise in value. Further downward pressure is widely expected by mainstream media, which is pushing the narrative of a U.S. Federal Reserve interest rate hike as early as next month.
Just how badly has silver fared?
Demand for silver declined by 4.1% in 2014 on the back of a 19.5% slide in investment demand. (Source: Thomson Reuters, last accessed August 10, 2015.) Keep in mind however that this is virtual, not physical demand. The wind taken out of silver’s sails cannot get significantly worse from the investor side.
There was no large-scale liquidation of silver exchange traded funds (ETFs) in 2014. (Source: Silver Seek, last accessed August 10, 2015.) Silver ETFs actually grew by 1.4 million ounces, finishing off the year with a record high of 636 million ounces. (Source: Thomson Reuters, last accessed August 10, 2015.)
The threat of rate hikes and a drop in demand are essentially what pushed silver prices down last year, which is more of a decline than gold or any other precious metal. Additionally, silver production increased by approximately five percent last year, adding greater downward pressure on the metal.
But why would miners produce more in an environment of declining prices?
It’s quite simple, really. Three-quarters of silver mined globally is a by-product of other mining initiatives. If it’s extracted, it will be sold regardless of the market prices.
Production costs have also decreased since silver’s price heyday in 2012, where mines have scaled up production but reduced average cost per ounce.
There’s also the residual effect of the precious metals bull market from 2001-2011, with the corresponding surge in the number of new mines opened. Once up and running, producers are unwilling to cut extraction because of low prices.
Output from silver mines has consistently increased for 12 straight years now. But this trend looks to be ending this year with prices sliding ever-lower. Precious metals experts over at GFMS have forecasted a hard four-percent decline in silver production for 2015. (Source: Thompson Reuters, last accessed August 10, 2015.) Their reasoning is simple to understand, given there are fewer large mines under construction.
This is not idle speculation; the supply and demand imbalance is quite real. The silver market is forecasted to experience a physical deficit of 57.7 million ounces in 2015. (Source: Silver Institute, last accessed August 10, 2015.)
Translation: the demand is there, but it’s waiting for a supply contraction to correct silver prices. As demonstrated, that supply crunch is here, and it might cause prices to soar.
But if production supply is decreasing, where else will demand turn to? This leaves us with physical supply in private hands, mostly in the form of jewelry and such. But such sellers are almost always bullish when it comes to selling, preferring to unload things like antique silverware if prices are high. They will likely hoard their physical goods at even the slightest hint of a major price upswing.
Where Can You Expect Demand to Come From?
Silver experienced increased demand in the first half of 2015 in the form of jewelry and industrial production needs. (Source: Silver Institute, last accessed August 10, 2015.) Indeed, U.S. imports of silver increased by 11% by the end of May, while China showed 14% growth in the same timeframe, signaling healthy physical demand.
The largest demand growth will be seen in the photovoltaic industry, in which silver is a critical building material. Solar panel producers alone are forecasted to increase their silver purchases by eight percent in 2015. (Source: Silver Institute, last accessed August 10, 2015.) The U.S. alone saw a 76% increase in the number of solar panels installed in the first quarter of 2015 compared to the same period last year.
The Bottom Line
The entire precious metals sector seems to be on the brink of a major upswing in prices next year, and silver is forecasted as likely to outperform gold. (Source: Thompson Reuters, last accessed August 10, 2015.) If industrial demand forecasts are correct, and the simple fundamentals of supply and demand can be believed, we are likely to see silver skyrocket in value by next year.
Market fundamentals are surprisingly good for silver prices this year, and could well push prices back up. Supply is declining, while robust demand is increasing.
The rate at which demand could spike by next year creates the chance for a major supply crunch. A wise investor would be well-positioned to turn a large profit if they were smart enough to buy silver now when it’s dirt cheap.