LONDON (Commodity Online): Silver has kicked off 2012 as the strongest-performing precious metal, up by 20% and back at levels last seen in mid-November. Silver’s rollercoaster performance last year was driven not by a tightening market balance, said Barclays Capital in a research note.
Rather, it was driven by strong investment demand, and retail interest in particular, compounding healthy industrial demand and then investor positioning being scaled back rapidly while a number of industrial users warned higher prices were negatively impacting end-consumption.
“We forecast silver prices to average $32.5/oz in 2012, marginally lower y/y, but retaining the ability to recapture the $40 mark. We continue to expect the market to be in surplus, burdened by record mine supply, thus exposing prices to the downside, but investor positioning looks set to be more supportive. We estimate silver coin demand globally hit a record high of 3.8k tones in 2011 but, sales in the US alone hit record highs at 1,240 tonnes according to the US Mint following record sales in January of 200 tonnes (190 tonnes January 2012),” Barclays added.
On a monthly basis, ETP demand and coin sales had helped to propel prices in April last year, but offset coin interest later in the year as flows turned to net supply and the diminished appetite meant prices struggled to challenge those highs. Total holdings hit a peak at 15,775 tonnes on 25 April and closed the year at 14,662 tonnes having dipped to lows of 13.9k tonnes. Indeed, the net outflow of 786 tonnes for the full year was the first year of supply of metal from the products following net demand of 3.1kt and 4.1kt in 2010 and 2009, respectively.
Speculative interest in Comex silver has also dwindled from 40k lots in February to 7k lots at the end of the year – its lowest since April 2003 – with non-commercial positions making up less than 10% at the end of the year. While prices lacked the investment support to be driven higher in H2 11, it does mean that investor positioning now is much cleaner, and an uptick in demand can drive prices higher from the floor that has been established.
Thus, given our positive view on gold, “We expect investment appetite to be supportive of silver prices but, should it ease, we would expect prices to remain volatile until they find physical support on the downside, which is likely to be closer to where prices started the year,” Barclays concluded.
