Outlook 2012: MCX silver: 38000-75000; COMEX: $23-50

Silver sports a positive outlook for the year 2012 despite the white metal exhibiting a mixed performance in 2011. Accordingly, 2012 MCX silver may trade in the range of Rs.38000-75000 even as Comex silver may maintain $23-50/oz, said SMC Global in a research note.

A bout of volatility was seen in white metal silver too. Silver witnessed a roller coaster ride in 2011 and was caught in investors’ wrong foot. Like Gold, silver also made its peak in 2011 and tested nearly $50 in COMEX and above Rs 73000 in MCX. April and May were the most volatile month for silver in the year 2011; silver prices rose by 32% in April while fell 28% in May 2011 due to steep hike in margin by COMEX and liquidation by some big players and hedge funds. Meanwhile the Gold silver ratio declined steeply in the first half of 2011 from nearly 47 to 32 as silver outperformed gold. However, the ratio again recovered during the second half of the year 2011 from 32 to above 47.

According to SMC Global, the ongoing uncertainty in the Western developed economies and the global equity markets supported the precious metals prices as large global investors and the central banks of many countries parked their funds in precious metals. Precious metals are considered as a safe haven in the light of the global uncertainties.

Lowering of sovereign credit rating for the US from AAA to AA+ by ratings agency namely Standard & Poor on August 5 also jolted the financial markets in 2011. Super committee was set up in the wake of the Summer’s debt ceiling debate. The bipartisan congressional ‘super committee’ tasked with agreeing measures to reduce the US deficit by $1.2 trillion over the next ten years.

Furthermore, the debt situation in Europe continued to haunt the global financial markets in 2011. Elevated borrowing costs persisted for an extended period which amplified the fiscal challenges being faced by the French government amid a deteriorating growth outlook, with negative credit implications. The debt crisis which started from Greece, Portugal and Spain slowly started affecting bigger Euro zone members like France and Germany. China, the biggest producer of precious metals and the biggest emerging market user, is said to be expanding at more than five times the speed of the US, driving the consumption of the precious metal in the industry.

Silver is often known as gold’s ugly sister because of its volatile movement. On the fundamental front, silver exports from China, the world’s largest exporters, is expected to drop this year as domestic demand from investors is expected to surge. According to a statement from China’s Ministry of Commerce, 2012 export quotas for Silver from Asian country have also been reduced by 5%. This amount will cut 283 tonnes in its 2012 silver export quotas from 5,670 tonnes in 2011. Roughly 70% of China’s silver demand comes from the industrial sector.

The industrial use of silver will also determine the future price direction. Demand from a number of industries which use silver, has been falling. Household demand for silver like cutlery, flatware, and candlesticks hasn’t risen since last ten years. Jewelry fabrication is up but only a blip. With the shift to digital photography and image storing, use in photographic film processing continues to fall. Thanks to the industrial users because of which the demand is climbing.

Since 1999, consumption in electronics has increased by 120%. Though use of silver in solar panels began in 2000 but now demand has risen up by 640%. Silver was first used in biocides (antibacterial agents) in 2002, while a small percentage of total silver use; now it has grown six-fold. However, these increasing sources of demand are now more likely to keep a floor under the price in the future. In fact, Silver Institute forecasts that total industrial use of silver will rise by 36% over the next five years, to 666 million troy ounces/ year. That’s a lot of silver, meaning this portion of demand, which is roughly 60% of all fabrication, isn’t letting up anytime soon.

Silver mine production has been increasing over the past decade, largely due to rising prices, allowing companies to ramp up production and bringing more metal to the market. In fact, global mine production is up by 33% since 1999. Silver is in supply deficit for the past 13 years. 2009 was the first year when equilibrium between demand and supply was reached. It was again surplus in 2010, in terms of industrial and jewelry fabrication demand. A lot of mining companies are showing lower production, with lower base metals prices. We know that a lot of silver comes from base metals and, it may Lead to further supply squeeze in future.

Apart from supply and demand fundamentals, other factors like Governments and commercials big banks like HSBC and JP Morgan are creating huge volatility in the silver market. The kind of volatility which we have seen in 2011 is very dangerous for the retail investors and most of them have lost heavily when they were caught on wrong foot in times of meltdown. Moreover, in the year 2012 it is expected that prices will remain on extremely volatile path given the global financial outlook and retail investors should invest only small portion to silver. The Gold silver ratio after hitting low of 32 in April 2011 have shown steady appreciation and can test 65 in 2012. – CommodityOnline

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Posted by Silver Guru on Jan 3 2012. Filed under Silver prices. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry