Silver Shortage Promises to Boost Price in 2019

(Bloomberg) -- Think of it as a potential silver lining for investors. A deepening shortage is promising to help boost prices as haven demand for the precious white metal rebounds in 2019.

Silver surged 9.1 percent in December, its biggest monthly gain in almost two years. The commodity has benefited as a persistent trade war, weakening dollar and prospects of slower pace of U.S. rate increases drove haven demand for precious metals. The price outlook is improving at a time when demand for gold's cheaper cousin is poised to top production for a seventh straight year.

With miners avoiding new projects amid global economic uncertainty, the price could spike as high as $17.50 an ounce from about $15.87 now, according to a Bloomberg survey of 11 traders and analysts. About 26,000 tons of silver is expected to be produced this year, according to estimates by Robin Bhar, a London-based analyst at Societe Generale SA. That would be the least since 2013, and means global physical demand will again top output.

“Supply growth has started to slow, more than for any other precious metal,” said John LaForge, the head of real assets strategy at Wells Fargo Investment Institute.

To be sure, a production deficit hasn't been enough to boost prices in recent years. Silver has traded more like a precious than an industrial metal, which is strongly influenced by supply and demand balances. The price of silver has plunged by almost half since 2012, the last time the market was in surplus. That was faster than the pace of decline for gold, the most heavily traded precious metal.

Industrial Outlook

In 2018, when Societe Generale estimated that silver had its sixth straight production deficit, prices still fell 8.5 percent, as gold slipped. And while a dimming global economic outlook is boosting haven demand for the yellow metal, it's also clouding the outlook for industrial demand. That uncertainty raises questions on the durability of silver's rally.

“We remain unconvinced that this relative preference for silver will continue,” analysts at Goldman Sachs Group Inc. including Hui Shan said in a report earlier this month. “With many more industrial uses, silver demand is also more susceptible to slowing global growth.”

Production has trailed demand for the metal used in making solar cells, computer touch screens and medicine. It's also popular among consumers as jewelry and tableware.

Industry, meanwhile, is the most significant user, gathering up about 55 percent of available silver yearly, compared with about 10 percent for gold. The metal's high conductivity to electricity and heat, along with its sensitivity to light and anti-bacterial qualities, contributes to literally hundreds of products, skewing the supply-demand formula for precious metals.

The industrial-applications sector will likely boost demand for the metal in 2019, according to Bloomberg Intelligence's analysts Eily Ong and Tobias Nystedt. They see silver with a 50 percent upside for demand by 2023, compared with 17 percent for copper and 11 percent for gold.

Other analysts see more of a balancing act ahead, with the relative strength of the global and U.S. economies playing a significant role.

The Federal Reserve is also an issue. Silver and gold have been among the best performing assets in the past three months as investors scale back expectations for interest rate hikes in the U.S. amid signs of slowing global growth.

However, the central bank has recently indicated it will monitor data moving forward to decide future monetary policy. If the Fed slows rate increases, it will boost the value of silver and gold; if not, it could drop.

Before late 2018, “there was no love for the metal. Going forward these concerns will be played out throughout the year,” said Maria Smirnova, a Toronto-based portfolio manager at Sprott Asset Management, which oversees C$10.3 billion ($7.6 billion). “There's been a sea change in investor sentiment that obviously drives precious metals, and silver takes its cues from there."

On Tuesday, spot silver rose as much as 1.1 percent and was on pace for a second monthly rally, the best streak in a year. The Bloomberg Precious Metals Subindex, which also tracks gold, jumped to the highest level since June, and was on pace for the fourth straight monthly climb.

--With assistance from Caleb Mutua.

To contact the reporter on this story: Marvin G. Perez in New York at mperez71@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Reg Gale, Joe Richter

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