Silver, gold’s ugly sister, still not finding investor favour – Thompson
The Gold Report: Chris, you recently called silver “the most volatile of all the precious metals.” Why do you believe that?
Chris Thompson: Silver is often called gold’s ugly sister because historically it presents itself as a very volatile metal, price-wise. Silver demand is typically determined by two main influences. First, silver as a store of value, much like gold. Second, silver is valued as an industrial metal. Right now, there’s a lot of concern about demand for silver as an industrial metal, about the lack of demand for silver for industrial fabrication. The interplay between these two demand uses contribute to its price volatility.
TGR: And you expect that volatility to continue for a while yet?
CT: I think so. We’ve seen a lot of volatility in gold. Earlier this year, many argued that gold could easily move up to $2,000/ounce (oz), over the long term. When gold ran up rapidly a couple of months ago, it did more damage than good to the precious metal sector because it caused a lot of people to wonder whether those high prices were sustainable. It discouraged them from playing the precious metal game in anticipation of a correction of sky-high gold prices.
The same is true for silver. Earlier this year silver approached $50/oz, and then fell back severely. My sense is the move forward will be volatile for a lot of metals, copper included.
TGR: You suggest the near-term price for silver will be around $38/oz. But, your long-term price drops to $20/oz. Is the lack of industrial demand behind that or are you just taking a very conservative approach?
CT: We are taking a conservative approach. We are looking for a weakening in the silver price into the medium to longer term. Anyone who suggested a long-term silver price of $20/oz a couple of years ago would have been called very, very aggressive. Now, a lot of commentators are predicting $20/oz in the long term. My sense is that $38/oz is a healthy price for silver in the near term, as is $20/oz as a long-term price. These prices will, in time, contribute to new mine production, which will contribute to new mined supply. Increased supply will depress the price of the metal.
Also, we have to recognize that 80% of the mined silver supply comes as a byproduct credit. In that sense silver production is linked to the economics of gold, lead and zinc. All things being equal, we are looking at good prices for gold and reasonable prices for base metals, all supportive of additional silver mined supply and a lower silver price in the long term.
TGR: For most of 2011, share prices of most major precious metals producers lagged the price appreciation of gold and silver. Lately that gap has started to close. Will this trend continue?
CT: I believe so, yes. I think the lag relates to the volatility of gold and silver prices, and arguably copper as well. That price uncertainty has caused a lot of companies to stay on the sidelines, to wait and see whether metals prices in the broader context are sustainable before engaging in merger and acquisition (M&A) activity. Now, I think there is a growing appetite for M&A in the precious metals space, being driven by the need to sustain production growth.
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