The Year of Silver

Jan. 13, 2004
Gareth Tredway

JOHANNESBURG - Silver, known perhaps irreverently as gold’s sister-metal, hit its highest level in almost six years this week as it piggybacked on gold’s strength and analysts expect the metal to run still higher. The metal hit $6.79/oz, its best price since April 1998. In the last two weeks alone, the metal has gained 15 percent.

Rather than any spectacular changes in silver’s fundamentals, the increase is perhaps best explained by the old adage, ‘in a rising tide, everything floats’. Analysts attributed the move to the upward movement across all commodities – gold included - as the dollar continues its slide.

Andy Smith, precious metals analyst at Mitsui Global Precious Metals, describes the relationship between gold and silver as “the great metallic struggle of fear versus hope”. Gold is obviously the proxy for fear while silver, with greater industrial application, is the flag-bearer of hope; the lower the ratio, the better silver’s performance.

The gold:silver price ratio peaked recently at around the 80 level and is now touching 64, a more favourable indicator for silver and for overall global economic welfare. Smith says: “The daily correlation between these two has weakened since ‘hope’ has been more obviously on the front foot.”

Last year saw a 28% rise in the dollar price of silver, where it peaked at close to $6/oz near year end, after reaching an intra-year nadir of $4.40/oz in March. Monday’s six-year price high reflected a 15% increase on the year’s opening price of $5.90/oz.

Smith says silver will continue climbing while the dollar’s slide continues. Dennis Dykes, an economist at Nedcor, one of South Africa’s big-four banks, reckons the euro could comfortably climb to as high as $1.35 in coming months, giving silver more headroom to appreciate. The euro is currently trading at $1.2750.

Other analysts believe silver would also have to catch-up with other commodities, given that it only saw a 28 percent increase last year. This feat, Smith said, was all the more remarkable given that it was achieved without the crutch of producer purchases, as was the case with gold.

Kamal Naqvi, precious metals analyst at Barclays Capital, says silver could reach the $7/oz mark before June. He says commodity prices usually rise in the beginning of the year, and so the key $7/oz level could even be reached in the first half of this year at worst, or at best, in the first quarter.

Naqvi said US market commentators made greater use of the gold:silver ratio and recent highs have been reached in the price due to their efforts to bring the ratio down. “A level of between 50 and 70 is usually maintained, where silver is bought above 70 and sold at below 50,” said Naqvi. Silver was used to manipulate the ratio, given that shifting the gold price to bring the ratio in line, would be trickier to accomplish.

Silver’s industrial applications, which include batteries, solar panels, bearings and electrical conductors, account for the highest offtake of silver, with photographic equipment coming in second. The advent of digital photography has placed the latter category at risk, although Smith points to anecdotal evidence that at least one US silver recycler had experienced a 45 percent rise in volumes in the first nine months of last year. The rise had been attributed to increased use of silver-rich paper in developing digital images.

Another silver-lining for the market is increased silver-coated super-conductive wire into China, which Smith reckons could herald the shift to a silver-coated power distribution system for the world’s most populous country.

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