Saturday, April 26, 2014

BEARISH Column On Silver

Today I enter a realm I have not explored much before: silver!  Most of you, dear readers, already are aware of the bullish case for silver (use is high, silver cannot -- in large part -- be recycled, low inventories, industrial use, etc.), and so because I am not an expert I have not addressed silver in any detail.

Because I have had no authors wanting to write an article on silver, this piece (and whatever else I come up with) is what you are going to get...

Instead, today I present a bearish case on silver, an exploration of a column written in this weekend's Barron's, in their "Commodities Corner" column.  Author Tatyana Shumway "covers metals markets and other topics for The Wall Street Journal".  I have seen her work before she would fairly often do the "Commodities Corner" columns when I used to review Barron's, but I do not keep track of predictions made by Barron's columnists.

OK, but now we will keep tabs on silver's price for a while: silver closed at $19.73 on Friday (, so we now have a line in the sand.  [Also a disclosure: I maintain a small position in physical silver.]

She titles her piece (Silver Buried by Supply Glut" and comes out swinging, Shumway"

"Prices are sliding toward 10-month lows, as supplies of the metal are set to outpace demand for the sixth straight year."

OK, I do not follow the world production and demand figures each year, so I have to assume that she knows what she is writing about.  Anyone who is paid to follow metals (and other similar topics) for the Journal are going to have great sources at hand.  She will get her phone calls answered as well...  Shumway quotes an expert:

""Silver has the worst story of all the metals," says Adam Klopfenstein, a senior market strategist with Archer Financial Services,..."

She goes on to write that both silver and gold had both been buoyed earlier this year because of:

1)  turbulence in emerging markets
2)  a safe place to stash money
c)  the escalating conflict between Russia and Ukraine

But, she thinks that investors are starting to focus on the US economy, where signs of growth might provide incentives to buy other assets.

Shumway then writes about supply & demand:

"On top of the potential for higher interest rates, the silver market has been inundated with with supplies of the metal, HSBC expects a 3.4% increase in the silver supply to 1.09 billion troy ounces in 2014, while demand will remain nearly unchanged at some 938 million ounces."

That works out to some 16% more supply than demand (1.09 billion / 938 million = 1.16).

She then writes that the "All-In Cost of Production" is some $15 - $17 (per troy oz), and then quotes precious metals analyst Howard Wen of HSBC as saying that producing silver is highly profitable when the price of silver hovers around $20 or above.  And the producers are likely to keep producing at these higher prices, furthering the glut.

Shumway then finds another expert (Mike Dragosits, senior commodity strategist with TD Securities) who believes that silver is expected to bottom out at around $18.52 during the second quarter (2014) and rebound to some $19.07 by year end.  Not so great with silver sitting at $19.73...  Dragosits believes that the Fed may boost interest rates too slowly, this would improve the prices for silver (and gold).


The above information is one reason why I believe it is important for students of precious metals to read beyond the cheerleading articles so prevalent on the Internet.  This is one of the very few bearish pieces I have ever read on silver...

Is Tatyana Shumway right?  We will see, we have her prediction starting from $19.73!


  1. Thanks for an interesting read. I don't know much about the inner workings of the metal markets, but I have had some good luck with relatively simple cyclical models of the PMs. Both the silver and gold cycle models have been working well, but going forward, there is a wide divergence - with gold rising and silver predicted to fall. So - maybe this might relate to some implicit silver supply - price lag time cycle that occurs in silver but not gold.

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