Consistent Silver Demand Clears All Doubts On The Future Price Winner

 |  Includes: GLD, SLV
by: Moneyline

Silver has long been a favorite for smaller retail investors and speculators who want to gain exposure to gold at a fraction of the price. This perception may drastically change in the coming time. Silver and gold have both declined sharply after the twin takedowns this year, while the price trends and movements have largely been towards the downside. But of late and based on the few weeks of relative price stability, there is more confidence for investors in making the switch back into the ETFs. After falling toward technical support at $18 twice and holding there each time, the price of silver has gained 11% in the last 30 days. Year to date, silver is still down 33%, underperforming gold which is down 21%.

While there are no signs of abatement in the outflows of Gold ETF (NYSEARCA:GLD), holdings of silver bullion bars by the world's largest silver-backed exchange-traded fund iShares Silver Trust (NYSEARCA:SLV) increased 144 tonnes, or 1.4%, on Wednesday to 10,428 tonnes, a two-month high. This addition comes in sharp contrast to figures and positions from a month ago when the silver ETF's holdings tumbled to a 2013 low of 9,882 tonnes, sparking fears that the small investors were beginning to lose faith in silver bullion. A rebound in silver prices triggered resurgent buying from longer-term retail investors leading to the biggest one-day jump in silver ETF holdings since January. In comparison, despite the rebound in gold prices in the past few weeks, the total holdings in gold ETFs continue to fall and remain at the lowest level since February 2011. Silver ETF investments are mostly done by retail investors who are game for the longer term whereas investors in gold ETFs are mostly the fickle minded money managers who (unlike Asians) are most willing to shift their focus away from gold, a point which I will elaborate upon later here.

U.S. MINT EAGLES - gold V/s silver SALES IN 2013 (Total ounces)

  • JAN = Gold oz. 150,000 silver oz. 7,498,000 Ratio 49.98:1
  • FEB = Gold oz. 80,500 silver oz. 3,368,500 Ratio 41.84:1
  • MAR = Gold oz. 62,000 silver oz. 3,356,500 Ratio 54.13:1
  • APR = Gold oz. 209,500 silver oz. 4,087,000 Ratio 19.50:1
  • MAY = Gold oz. 70,000 silver oz. 3,458,500 Ratio 49.40:1
  • JUN = Gold oz. 57,000 silver oz. 3,275,000 Ratio 57.45:1
  • JUL = Gold oz. 36,500 silver oz. 3,456,500 Ratio 94.69:1
  • (Figures as on 24 July 2013) (Ratio of silver Ounces bought per 1 gold Ounce)
  • Total gold oz. 665,500 silver oz. 28,500,000 Ratio 52.42
  • 52.42 = Avg. of silver ounces bought per gold ounce in 7 months till July

Data Source: U.S. Mint

Silver Demand Statistics:

The U.S. mint sold 19.67 million silver eagles in the first seven months of 2012, down 22% compared to the same period a year before. In 2013, not only have the sales (28.5 million) surpassed the 2012 sales by 45%, they are also higher than 2011 by 3.2 million or 13%. Moreover this doesn't include a final update (happening next week) when the final July figures are posted on 1 Aug 2013.

The average gold price for the month of July has been $1280. Thus investors have bought $46.72 million worth of American Eagle gold ounces. On the other hand, the average silver price for the month of July has been $19.65 and so investors have pumped in a massive $67.92 million into silver bullion, based only on the (till date) July sales for gold and silver bullion from the U.S. Mint alone.

If you notice in the table above, investors have consistently increased silver purchases, especially after the April price takedown. Also notice the ratio of silver ounces bought per gold ounce. This ratio has been rising from 49.40 ounces to 1 ounce of gold in May 2013 and is now sharply up to a staggering 94.69 ounces of silver to 1 ounce of gold in as on 25 July 2013. This ratio has consistently maintained at over 40:1 except for the month of April, when an exceptional decline of over $200 in gold prices in just 2 days triggered a frenzy of gold buying across the world.

Unbelievable facts about silver Investment:

A very interesting point based on the fact that gold ETF holdings have seen unstoppable outflows whereas silver ETF holdings are rising, is that money flowing out from gold is turning towards silver. Even at its lowest point in May, silver ETF holdings had only fallen by about 2% for the year and after the recent addition, silver ETF holdings are now 3% higher for 2013.This makes the trend for the future very easy to see without much analytical knowledge or efforts. This is also helped by the fact that the price of silver is currently 65 times less than that of gold bullion, which means that 1 ounce of gold can buy 65 ounces of silver. In such a lucrative scenario, any sizable amount of investment flow into silver will push its value significantly higher in percentage terms. Gold has slumped by around 39% to $1180 from its lifetime peak of $1921 in Sep 2011, while silver prices have crashed by over 64% to $18 from around $50 in April 2011. Just imagine this: Supposing that these metals rise back just to their lifetime peaks - gold would return close to 63% on investment while silver would deliver a mind boggling 180%. Is that enough to convince the potential of silver investment today?

Will the world's largest gold consumer become largest silver buyer?

Demand for gold from India, the world's largest gold consumer has been extraordinarily high after, especially the price fallout in April. This demand stretched the nation's current account deficit to such an extent that the government had to impose massive curbs on gold imports while also raising the import duty to 8%. Silver has not been exposed to the same import restrictions that gold has and recent silver import figures confirm that investors have flocked to silver, likely as a substitute for their desire for gold. Silver imports by India during the January-March quarter stood at 760 tonnes. Imports shot up to 720 tonnes in April alone, and in May they further swelled by 920 tonnes. While India imported 1,900 tonnes of silver in 2012, in the first five months of 2013 alone, imports touched 2,400 tonnes. Let's put these numbers in perspective, according to the Silver Institute, the world produced 24,478 tonnes of silver in 2012, implying that Indians have imported almost 10% of world production so far this year. If they continue to import at the same pace as they have in May, over the next 12 months India could import close to half of world silver production which is a truly staggering shift in demand for silver.

All is well when you get the timing right

Investors from Europe and the U.S. never really liked gold or silver as an investment option and so realized the value in this too late. I was gold bullish from 2004 till 2011 and many times ridiculed for advising a lion's share of a portfolio toward gold investments. These investors (or money managers in most cases) grudgingly entered this segment, but were a tad too late and eventually never got rewarded for the same and were forced to exit from gold. This bitter experience combined with a preference for stocks which has clearly paid off recently will make a shift to gold or silver a bit more difficult for many of these investors. Most of the western investing world will realize the importance and value of investment in bullions, especially silver only when the value of paper assets, where majority of the world is now invested in, evaporates due to unavoidable economic as well as monetary imbalances. Probably by then only a fraction of their investment, could possibly be redeemed.

As for the Fed's taper fears, think logically. Believe in what politicians and central bankers DO and not what they say. There are more chances of adding to the stimulus rather than tapering off the currently running one. Also do not ignore the fact that crude oil is rising sharply and Inflation is bound to rear up its ugly head anytime soon. The experts at data manipulation too may be rendered helpless and admit to a spike in inflation. There are many who would love to contest the Inflation point, which (as per government data only) has not show a rise even after massive QE inflows for 5 years now. Check the real world rates today in comparison to the past five years and I would not have to explain anything further. Well, considering that this does not happen and all seems to go fine - I also suppose that if the U.S. Congress somehow manages to balance the budget this September or (if delayed) November, also avoids a credit rating downgrade and financial peace across the world is confirmed, then silver prices are unlikely to rally … but then we all know …. And so I would rather bet on higher silver prices - happily at that. I would not be surprised to see an explosive rally in silver prices in the next 3 to 5 months which will make today's sub-$20 silver look like an absolute bargain.

An interesting read on the same that you may like: Silver At Less Than 19 Dollars An Ounce? Are You Kidding Me???

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I am long in silver and will add more on any price dips if seen. Also holding some gold.