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Speculators Polish Up the Price of Silver

“Almost anything is better than paper money ... any fool can run a printing press.”

These are not the words of a modern-day gold bug, but attributed to Nelson Bunker Hunt, the billionaire oil baron who went long on silver in the 1970s. So long, in fact, that he and his brother cornered the market, were sanctioned by the regulator for market manipulation and went bankrupt in the process.

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After their move, the price of silver hit a peak of $50 an ounce in 1980 before dropping to $10 the following year.

In the past month silver has bounced back to prices not seen since the Hunt brothers’ day. No single investor is cornering the market but, just as in the 1970s, the price is being driven by surging speculative demand as investors sweep up supplies of the grey precious metal whose primary use is industrial.

Investors in silver, also known as “poor man’s gold”, are persuaded by many of the same arguments that have driven the gold price higher: the prospect of a global “currency war” in which central banks race to devalue their currencies to support domestic growth and the belief that a second round of emergency monetary easing by the Federal Reserve could eventually lead to a sharp jump in inflation.

Gold has captured the headlines, ticking off one new record high after another, but volatility in bullion is near a five-year low, which for some investors makes it a less exciting prospect. Returns on silver, they say, could be greater.

Indeed, there are symptoms of spreading silver fever. Sales of silver coins are set to hit a record high this year, while investors have snapped up more than 1,500 tonnes of silver through exchange-traded funds (ETFs) in the past two months alone. That is more than 5 per cent of total annual silver supplies.

Michael Kramer, president at Manfra, Tordella & Brookes, a large US coin dealership, says: “Silver coins are doing very well.”

David Madge, director of bullion sales at the Royal Canadian Mint, says it has already sold in excess of 30 per cent more of its popular silver Maple Leaf coin than last year’s record 10m ounces. The US Mint has sold 27.5m ounces of silver American Eagles so far this year – already within reach of last year’s record 28.8m ounces with the busy Christmas period still to come.

The interest in ETFs, coins and futures has helped to drive prices higher. Silver is one of the best-performing commodities this year. In the past two months it has rallied 31 percent – to $23.72 an ounce on Wednesday – more than three times gold’s 8.9 percent rise.

The price rises, in turn have prompted a response from the main silver mints. The US Mint this month raised the premium above the value of the metal content that it charges dealers buying silver American Eagles. The Canadian mint has run out of 2010-dated silver Maple Leaf coins, although Mr. Madge says it would produce more if needed.

Analysts and investors, though, are divided on the outlook for the metal. Some see silver as having brighter prospects than bullion. The reason for this is that, unlike gold, for which investment is now the biggest single source of demand, silver consumption is still largely accounted for by its traditional end-uses in the production of jewellery and in the electronics industry and photography. In theory, this should mean that, as the world economy recovers, silver will benefit from an extra shot in the arm and outperform gold, says Daniel Brebner, commodities analyst at Deutsche Bank in London.

Matthew Turner, analyst at Mitsubishi, the Japanese trading house, says: “There are two drivers for silver: industrial demand and gold. The two drivers are both positive at the moment.”

Traders and refiners have reported a strong rebound in industrial demand for silver. Solar power, which uses silver-containing chemicals to convert sunlight into electricity, is a source of new demand. Traditional consumers in the electronics industry are also bouncing back strongly, refiners say.

Scott Morrison, chief executive of Metalor, one of the world’s top precious metals refiners, says: “Industrial demand for silver is very strong – back to 2008 levels or even better.”

Nonetheless, silver prices are likely to remain driven by the investment community in the short term. Hedge funds that are bullish about gold have begun taking positions in the silver market, aiming to profit from its higher volatility, bankers say.

That could lead to sizeable price swings in the short term. As the silver market is a good deal smaller than that for gold, a large investment can have a bigger impact on prices. Some senior traders are looking for silver to hit $30 an ounce in the next year, a 25 percent increase on current prices. But analysts, bankers and industry executives alike are wary of the higher volatility that hedge funds and other investors are bringing to the silver market – especially as mine production of silver, unlike some other metals, is relatively plentiful.

“Investment demand is critical in a market where growing fabrication demand is not sufficient to propel prices,” says Suki Cooper, precious metals analyst at Barclays Capital. “If investors stop accumulating fresh metal to position against market uncertainties, prices could correct sharply before finding fundamental support.”

No one is trying to corner the market, at least not yet, but the risk-averse should probably tread warily.