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Silver Outlook 2014 – Expect More Tarnish

Silver, silver ETFs, and silver miners aren't looking healthy headed into next year

If you thought your gold stocks were miserable performers in 2013, you can at least take some solace in the fact that silver’s performance was even worse. While the SPDR Gold Shares (GLD) are in the hole 27% year-to-date, the iShares Silver Trust (SLV) is down 33% since the end of calendar 2012. Silver prices fell from $30.38 per ounce to the current value of $20.36 per ounce.

silver-outlookIt was even worse for the miners. Hecla Mining (HL) has tumbled 51% for the year so far, as has the Global X Silver Miners ETF (SIL).

What gives? And more importantly, what’s the silver outlook for 2014?

Silver Demand Remains Brisk

Considering the extreme plunge in silver prices this year (following the equally-extreme increase in price over the course of 2010 and the first half of 2011), you’d think demand for silver swelled and then imploded … as it did for gold.

That’s not how things are, however. The reality — at least, according to Thomson Reuters Gold Fields Mineral Services — is that silver consumption/fabrication is going to improve by 4% this year, to roughly 880 million ounces.

It’s not like there’s one particular aspect of consumption that’s wildly out of whack and deflating prices either. Jewelry designers, technology producers, silverware stampers, coin minters, and medal makers are all on pace to use more of the stuff in 2013 than they did in 2012.

Ditto for silver ETFs and other investment vehicles. Demand for silver as an investment this year is on track to be roughly 14% stronger than last year’s total demand. As of the end of October, silver owned by investors via silver ETFs was at a near-record 655 million ounces, up by 25 million ounces at the end of 2012.

Silver demand, by purpose

The only industry that’s going to use less this year, in fact, is the photography industry — largely thanks to the ongoing growth of personal photo printers. Even then, though, photographic-based demand for silver is only going to slip by about 3.0% in 2013, which will be more than offset by rising demand in other areas.

So if it’s not the supply and demand dynamic that’s sapping prices, then what could possibly be driving silver (back) into the ground? One word … gold.

The gold-silver association stinks, to be sure, and it’s mostly rooted in flawed reasoning, but silver has been tossed into the same speculative lump gold’s usually found in. Ergo, whichever direction gold moves, silver’s going along for the ride.The scary part: If steady and even modestly increasing demand can’t spur silver prices in an upward direction but instead lets it slip 58% from its 2011 peak, what happens if demand actually dries up?

And make no mistake — very little of the silver we consume every year is for speculative purposes like ETF holdings or bar-hoarding. A tad more than 44% of 2012’s silver consumption (of 1,048 million ounces) was used for purely industrial purposes, while only about 23% of that consumption could be considered for purely-speculative intents. Only 17% of it gets turned into jewelry.

Meanwhile, nearly half of the gold we dig up every year becomes earrings and necklaces, with another 40% of our gold supply being converted to bars and coins, or purchased by ETFs and central banks. Only about one-tenth of our annual gold production is for industrial purposes.

Gold and silver usage

Data provided by World Gold Council and Silver Institute

Yet, silver prices remain more subject to the market’s whims than gold prices are. Scary.

Silver in 2014

Inasmuch as gold is apt to continue hitting a headwind in 2014, so is silver. And yes, that includes the iShares Silver Trust.

And with silver now trading at only $20.36 an ounce, miners like the aforementioned Hecla Mining and most of the other silver miners held in Global X Silver Miners ETF are facing a tough choice: Continue to operate at a loss, or shutter mines until conditions (i.e. prices) improve. See, though they fell a bit last quarter, the average miner’s “all in” cash cost to dig up an ounce of silver was $20.08 per ounce. That leaves little room for a profit margin, and for some miners, it leaves none.

With all of that being said, there is one bright spot for the commodity heading into 2014. As of the latest data, the gold/silver price ratio now stands at a 61.9 versus the modern-era average ratio value of around 55.0. This just means that silver is undervalued relative to gold, implying silver is due to “catch up” to the norm. It’s a dubious bullish argument though, as gold could just as easily lose value — and silver could completely fail to budge — if the ratio truly is due to return to the mean.

Silver Futures

Chart created using Genesis TradeNavigator

Bottom line: The technical chart of silver says the metal will do well to move above a swath of resistance around $26.40 per ounce, while a break under the floor near $18.90 could completely pull the rug out from underneath the commodity.

Bluntly, it’s not worth the risk.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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