I have been following the silver ETF (SLV) and I would expect it to go lower. Bargain hunters are picking up silver coins and buying the metal since it has dropped in value about 20% since the beginning of the year. Is it a good time to buy? I believe the price of silver will rebound, but just over half of the demand for silver comes from industrial use. It would make sense from an investor's standpoint to buy the metal as economies expand and manufacturing demand picks up. But right now-- in 2013, that is not the case.
At the beginning of the year, there were grand expectations for the price of silver (and gold) throughout the year. It was predicted that ongoing economic uncertainty would push big-money investors and other institutions toward hard assets like precious metals, gold and silver. This would push gold prices up and in turn would make retail investors gravitate toward silver because it was less expensive and more affordable.
The dangerous thing about investing in silver is that it has a small market and is used for both precious metals and industry. This makes the metal susceptible to more volatility and sudden price swings. The industrial use of the metal is just over half of its demand. Whether or not this would be an attribute to the price of the stock was unknown because of economic uncertainty. The uncertainty could add to big price swings through the year.
Analysts were banking on continued growth in China as well as other emerging economies to pick up the demand of industrial silver. What the analysts have been expecting is not happening and because of this the "industrial pricing" of silver will remain depressed.
Even though China continues to grow in "double digits" it has had a series of weaker economic reports that point toward weakening growth. Domestic demand remains soft and the economy also remains weak compared to what it has been in the past. Manufacturing continues to shrink because of oversupply and the rate of return on investing in the sector also continues to get smaller. For this reason a strong rebound in the Chinese economy is not expected to take place this year.
Do investors anticipate China putting together a new stimulus package for the economy? Maybe not! China's newly installed government led by President Xi Jinping and Premier Li Keqiang has no intention of launching a fresh stimulus at this point. The nation is interested in focusing on economic balance since some sectors grew much faster than others. The new regime is interested in slow, steady balanced growth from this point on. Staying at about 7% is what the country is focused on. For this reason the industrial demand for silver in China is not going to pick up since the government is more interested in slowing economic growth, making it more balanced and steady.
Complicating things for the emerging markets industrial demand for silver, Brazil's economy unexpectedly slowed. For the fifth straight quarter, the gross domestic product expanded at a slower rate than analysts had expected. Expansion is decelerating. The government has lowered borrowing costs, taxes, and utility rates but it hasn't helped slow the deceleration. Analysts are expecting investment momentum to slow down also since a "truck sales stimulus" is about to end. Dragging down growth in the first quarter was a 0.3 percent contraction in industrial output.
At this point in 2013 it looks like Brazil is going through a phase of fast inflation but slower growth. Because data on consumer consumption is also weak, some analysts are debating whether or not the country's slow down will be prolonged. With consumer consumption easing, industrial demand for silver is also going to decrease since manufacturing demands will also ease.
India's economy has recorded its slowest growth in the last decade, coming in at only 5% and it doesn't look like growth is going to expand anytime soon. Just two years ago India's economy was expanding at 9%! In an attempt to rekindle the flame, the government is attempting to backtrack on some policies it recently put in place. The central bank increased interest rates quite a bit from 2010 through 2011 to combat inflation but has cut those rates three times this year already. It is trying to find a common balance between jump starting the economy and battling inflation rates.
In late spring (April), the economy grew at 2% while analysts were looking for a growth rate of 2.4%. This does not sit well with analysts considering that in March of this year the economy grew at 3.4%. India has the highest retail inflation among the larger emerging economies like (Russia, China, Brazil, and South Africa). If I can put a good spin on India's economy; the nation's Consumer Price Index (CPI) actually slowed down for the third straight month and sits at 9.31%. This may be good, but slowing economic growth does not equate into a larger industrial demand for silver.
Over half of the demand for silver comes from industrial needs. The emerging markets are not growing right now, they are decelerating. This translates into less demand for the white metal from a manufacturing standpoint. The European economic recovery remains on life support and the US economy continues to crawl forward. From an industrial standpoint, I don't see the price of silver increasing anytime soon. For this reason investing in the metal right now may not be a good move unless the investor is prepared to see additional losses in value before prices rebound.