Silver prices have plunged more than 67% since the metal’s peak in April 2011. The weird thing is that fundamentals of the grey metal have remained solid. Based on the following points, investors should have a bullish silver price forecast.
Spot Price Greater Than Near-Term Futures Price
There is an interesting pattern for silver prices in the market. If you compare the spot price of silver to the near term futures price, you will see that the spot price is actually higher than the futures price due for delivery in a few weeks.
Under this price pattern, investors could sell their silver today in the physical market, and then buy it back in the futures market a few weeks later and profit. Moreover, investors could also avoid the storage cost over this period.
The thing is, investors are not doing that, with the reason being the counterparty risk in the futures market. Investors are not sure whether they can get their silver back when the futures contracts are due for delivery. This only happens when markets are undergoing extreme conditions—when the demand for physical silver outweighs the supply. Investors don’t know if the sellers of futures contracts can deliver the metal due to tight market conditions.
Smart money investors clearly see a crisis coming in the next few weeks. And that’s bullish for precious metals like silver.
Many Short Positions Due for Close
At the beginning of this year, silver futures had an open interest of around 150,000 contracts. Midway through the year, its price has dropped while open interest increased to 200,000 contracts. This suggests that in the first half of this year, a substantial amount of short positions have been taken.
High open interest during price drops is an upward sign for silver. Many investors who shorted the metal have already made large profits during the fall of silver prices and may cover their positions soon. Moreover, when prices rise, more short positions will be closed as margin calls start to come in.
However you look at it, silver is being oversold and is due for a big squeeze.
Solid Fundamentals: The Rise of Solar Energy
The plunge of silver prices in the last four years reflects more of a change in sentiment rather than a change in fundamentals. Fabrication demand, which involves jewelry, industry, photography, and silverware, has remained strong. China’s slowdown had some effect on the demand for silver, but jewelry and investment demand are expected to increase due to such low prices. Moreover, something is about to give a big push to the price of silver.
The pusher is going to be solar energy. Silver is a crucial part in the making of solar panels. The grey metal is used to conduct electricity out of solar cells. The use of silver is on a massive scale: the Silver Institute estimates that approximately 2.8 million ounces of silver are needed to generate one gigawatt of electricity from solar panels.
Growth in solar energy has brought increased demand for silver. Back in 2000, only one million ounces of silver were used in photo voltaic cells to make solar panels. By 2013, the usage of silver in solar panels had surged to 64.5 million ounces and is expected to grow to 100 million ounces in 2015. (Source: PV-Tech, last accessed July 6, 2015.) The increasing use of silver in solar panels could give a solid boost to the price of silver in 2015.