Why There Is Huge Potential For Higher Silver Prices

| About: iShares Silver (SLV)

Summary

Silver retail investment and jewelry fabrication hit a record high in 2015.

The silver market had an annual physical deficit for the third consecutive year in 2015.

In 2016, safe haven demand took prices higher and is expected to increase.

Price-driven production curtailments in 2015 are starting to impact silver.

Silver (NYSEARCA:SLV) has gained 25% year-to-date after a four-year decline of 73%. Although the silver market had a growing annual physical deficit for the third consecutive year in 2015, the price didn't stop falling. Since the beginning of this year, the price has finally adjusted. Increasing safe haven demand, along with mine supply reduction based on the low prices in recent years, makes silver an interesting investment.

Silver serves as a commodity used in industrial fabrication as well as a precious metal being a safe haven investment, so its direction can't be predicted that easily. In several cases, weak Chinese data were negative for silver in 2015. Other times, worries about a global slowdown boosted silver.

Below, I want to evaluate supply-and-demand figures for silver and its seasonality as a guidance for the future development of silver. Supply-and-demand data are from Thomson Reuters.

Supply

Global mine production growth slowed to 2% last year, although it set a record annual total of 27,579t. The copper sector - of which silver is a byproduct - was the principal driver behind the total increase, showing a 7% year-on-year output climb. However, price-driven production curtailments in 2015 are starting to impact silver.

Scrap supply declined by 691t (13%) year-on-year.

Demand

Silver retail investment and jewelry fabrication hit a record high in 2015 - total physical demand rose to 36,405t (up 3%). Industrial fabrication fell to 588.7 Moz (18,311t), down 4% from the previous year. Declines in electronics, brazing alloys and solders, and photography were offset to an extent by record-high solar and ethylene oxide catalyst demand. Silver demand for photovoltaic applications rose 23 percent in 2015 to 77.6 Moz (million oz), marking the second consecutive year of increases in this sector, driven by strong growth in Chinese solar panel installations. Increasing demand from these sectors should continue to partly offset weaker industrial fabrication due to a slowdown in global manufacturing.

Seasonality

Looking at the seasonality of silver, the ideal time to buy would be towards the end of June. This year so far, silver has moved pretty much according to its seasonal chart pattern - expect for the recent spike following weak jobs data on June 3rd.

Conclusion

The Fed's policy will continue to influence silver substantially throughout 2016. Despite the risks of a strong dollar being negative for silver, the resulting instability in emerging markets (caused by a strong dollar and higher rates in the U.S.) will be enough reason to keep up investments in silver as a safe haven. The ongoing physical deficit and mine supply reduction will then provide huge potential for silver.

I suggest to wait for a correction in silver - which could be after the Fed meeting or strong inflation numbers this week.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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