NOVEMBER 12, 2010, 9:48 P.M. ET.
Beware the Risks to Silver's Golden Age .
By LIAM DENNING
Lock up your spoons.
Investors' appetite for silver has cranked up. Having traded in a range of $15 to $20 an ounce for most of the year, silver's price has jumped 40% to around $27 since late August, when Federal Reserve chief Ben Bernanke dropped heavy hints about another round of quantitative easing. Gold is up just 11%.
Last week illustrated perfectly why silver's elevation to investment darling-du-jour is both exhilarating and fraught with risk. Tuesday, silver surged 11% to over $29 intraday, then slumped 9% on news that CME Group was raising the margin requirement for silver futures. The following day saw the largest daily inflow to silver exchange-traded funds since December 2007, according to Suki Cooper, precious metals analyst at Barclays Capital.
Silver has a split personality, as both an industrial metal and a precious metal. Between 2003 and 2008, 63% of global supply went into industrial and photographic applications, according to HSBC. In 2009, that plunged to 49%.
Meanwhile, implied demand from investors surged from an average of 5.8% between 2003 and 2008 to 12.4% last year. Silver backing exchange-traded products has gone from nothing to about 14,000 metric tons—equivalent to almost seven months' worth of supply—in less than five years.
About a quarter of silver supply goes into making jewelry, demand for which is fairly consistent.
HSBC doesn't expect industrial and photographic silver consumption, which fell by a quarter between 2007 and 2009, to recover to prerecession levels anytime soon, in part because digital cameras have pushed photographic demand into structural decline.
Supply is ample. Roughly two-thirds of mined silver is produced as a by-product from producing other metals such as copper. Given the fact that base metals have also been on a tear, miners are encouraged to dig as quickly as they can. Ms. Cooper expects this year to be a record one for silver mining, and next year to witness higher output still. This is in marked contrast to gold, where miners have struggled to raise output.
HSBC, meanwhile, estimates even high-cost, marginal mines can produce silver for about $10 an ounce. Prices could fall far indeed, therefore, before deterring extra supply.
So silver is largely dependent on investors' faith. It also looks expensive. In 2009 dollars, this year's average price of about $18.50 is 42% above the average since 1976. It is still well below 1980's real peak of about $55. But is the era of the Hunt brothers' market squeeze really the best benchmark? Strip out 1979 and 1980, and the next peak is $24.75. Even that figure is for 1981, when the price was coming down from the Hunt brothers-engineered highs.
Another oft-cited measure is the ratio of the gold price to silver. Today's 50 times compares with a 20-year average of almost 68 times.
It is also worth noting that silver's 90-day correlation with equities has spiked above 90%, which suggests silver's traditional portfolio diversification benefits are lacking, at least for now.
Volatility is also high. With silver at $29, the margin increase that touched off Tuesday's intraday slump was equivalent to going from 3.4% of a futures contract's value to just 4.5%. The price slipped 3.5% in Friday's broad selloff.
Recently launched physically backed base metal ETFs also present a threat. By allowing investors to split their bets on dollar depreciation and industrial recovery between, say, gold and aluminum, they could draw investors away from silver's hybrid exposure. Given its dependence on the incremental investor to keep climbing, even a small shift away could touch off a meltdown.
Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
0 comments:
Publicar un comentario