The spot price for silver hit a six-year low this week amid a large sell-off in the precious metals generally. Silver prices had remained fairly insulated during the past five weeks before breaking lower. One prominent reason silver spot prices have remained flat is because of the steady supply of silver which has been produced for industrial purposes.
Silver is sometimes called a "hybrid metal" because it is both a precious metal and widely used in industry. This means that silver prices aren't only affected by the precious metals market, but also by industrial demand for medical equipment, electronics, radiography, and the manufacture of electrical systems.
Spot silver had been stuck near $14.55/oz before rallying some 2% back to nearly $14.90/oz by week's end. So what are market analysts saying about the future of silver prices?
Much of the mainsteam news has expressed doubt about the future prospects for silver. The Wall Street Journal cites the 4% decline in investment demand for silver last year and the relatively more modest 0.5% drop in industrial demand as worrisome signs. Without expectations for high inflation, bearish sentiment for silver has prevailed, as investors typically choose the metal when they expect the metals prices (or prices for any tangible asset) to appreciate as the value of currencies decline.
The Case for Higher Prices
In a recent report, Capital Economics sees a more promising future for silver. The firm supports the idea that the current slump for spot prices for silver and gold will create higher sales for silver which will therefore curb the supply of silver and accelerate the decline of silver production. This is already playing out on the retail market: the sale of silver coins from the U.S. Mint during July actually doubled, year-over-year, thanks to lower prices.
On the industrial side, the majority of the silver that is consumed worldwide does not come from primary silver mines. In actuality, less than one-third of silver comes from primary mines. Because the majority of silver comes from secondary mining processes, its price is partly linked with the prices of other industrial metals. Specifically,this includes lead, copper, nickel and zinc.
Unfortunately, lead, copper, and zinc mines are becoming more and more scarce. This decline in lead and zinc mining will not only affect the production of lead, copper, and zinc. Silver could become more scarce as well. As mentioned earlier, most silver is not mined from primary mines. The closure of zinc and lead mines may be helping the prices for these metals, but it also means that the mines’ silver byproduct will become even more limited.
While spot prices may be low for silver, the demand for it is relatively high. This is especially true for the demand for industrial-use silver. Both China and Taiwan are major consumers of industrial silver and the rise in demand could add to the already-expected hike in silver spot prices. According to Capital Economics, “silver as a by-product could start to dry up soon, leading to a much sharper slowdown in output than we had originally anticipated.” Perhaps the closure of lead, zinc, and copper mines will begin to slow and not affect the production of silver too greatly. Unfortunately, the success (or failure) of these non-primary mines affects the futures of zinc, copper, lead, and silver.
Supporting this notion are the current drops in the Greek and Chinese markets, which could lead to an even greater demand for precious metals as safe havens. The uncertainty of the international market has long been a contributor to sales in precious metals and will likely continue to be a driving force in drawing consumers to the safety and stability of precious metals.