After starting the year on a strong note, gold and silver have spent the rest of the first half struggling, with their prospects for the rest of 2012 hinging on economic growth and a solution to the debt crisis in the eurozone, say analysts.
Although silver saw a 30% gain in the first two months of the year, the last four have seen the metal slide, hitting a 19-month low last week. The September contract is currently trading around $27.59 on the Comex division of the New York Mercantile Exchange (June 29) and overall, silver is now down around 7% year to date.
Similarly, silver stocks have taken a dive as the year has gone on, with Pan American Silver (PAAS) down nearly 27% so far this year, while Silver Standard Resources (SSRI) has tumbled more than 26% in 2012 and Silver Wheaton (SLW) has given back 16% (to June 28).
The iShares Silver Trust ETF (SLV) is down over 9% so far in 2012, while the Sprott Physical Silver Trust (PSLV) has fallen more than 22% this year.
This week, Morgan Stanley lowered its precious metals price forecasts for 2012 through 2014, cutting its silver price forecast for 2012 to $31.50 and for 2013 to $34.90.
Of course, gold hasn’t had an easy year either, posting double digit gains in the first two months before a February 29 correction led to a volatile four months for the metal.
With silver underperforming gold by more than 5% year-to-date, Charles Gibson, director and mining sector head at Edison Investment Research in London, calls the first six months of 2012 “a half of two quarters” for the metal. Hopes of monetary easing and a degree of economic growth in the first quarter, he says, gave way to fears of global economic stagnation and the potential for Europe “to drag the world into a debt deflation spiral.”
“On the up, silver benefitted from its industrial role, on the way down it declined because of it. Gold, by contrast, was the more stable, perceived more as a monetary asset than an industrial one,” he adds.
“Since fears of economic stagnation are uppermost at the moment and the Fed has apparently gone cool on further quantitative easing,” explains Gibson, silver has fallen by more than gold and underperformed so far this year.
Earlier this year in the World Silver Survey 2012, Thomson Reuters GFMS also said silver’s traditional high price volatility and trading range are factors to consider, with silver’s average first-quarter 2012 price volatility sitting at 34.4%, compared to gold’s 20%.
Still, Peter Fertig, director of QCR Quantitative Commodity Research in Germany, explains that based on the net-long position of large speculators, the total open interest in gold and silver futures, and holdings in the iShares Silver Trust ETF and SPDR Gold Trust ETF (GLD), market interest in silver remained stronger compared to gold during the March to June period.
So, could there be an upside for silver in the second half?
Gibson notes that the silver price is currently cheap compared to gold at a ratio of 59-to-1 vs. a long term average of 40-to-1.
However, he explains, “silver’s industrial applications probably make it less attractive to investors at the current time than gold. It is still a safe haven, but somewhat less safe than gold and a touch less safe than platinum, but much safer than copper/nickel etc."
In terms of investor preference, Fertig also doesn’t see silver moving out of gold’s shadow anytime soon. “Central banks are less likely to replace gold with silver as part of its reserve holdings. Storage costs are favoring gold. It is also rather unlikely that hedge funds would build net long positions in silver exceeding those in gold,” he says.
When it comes to performance, Gibson explains that silver will outperform gold on a consistent basis in an environment of economic growth and positive real interest rates. However, he says he’s not sure he can see that happening in the near future. “That doesn’t make silver a bad investment and I’d certainly recommend that investors have exposure to it, but I would be less overweight from a strategic perspective than I would be in gold,” he adds.
Robin Bhar, an analyst with Societe Generale, recently told Dow Jones that there are just too many negatives for silver. "Negative investor sentiment combined with weakening industrial activity, plus the possibility that there are some investors in the market waiting to sell into rallies, suggests that silver even getting above $40, let alone $50, is far too ambitious,” he says.
With the main risk factor remaining the debt crisis in the eurozone, Fertig says gold and silver might remain range bound, with the risk biased to the downside and the gold/silver ratio possibly rising further.
However, in terms of price performance, he says “silver could shine brighter than gold soon,” depending primarily on whether a solution to the eurozone debt crisis is reached.
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