The bearish case for silver

Standard Bank in its latest quarterly outlook makes a bearish case for silver, predicting a slim chance of recovery for the precious metal down 27% in value year to date.

Spot silver on Wednesday was changing hands for  $21.90, a 2.2% retreat on the day and more than a third below levels reached this time last year.

Standard bank forecasts silver is likely to trade below $20 an ounce for short bouts this year and forecasts the metal will average $23.50 an ounce this year from more than $31 in 2012 and weaken further next year to average $21.80.

A primary reason for the bearishness of the commodity analysts at the South Africa-based bank is abundant inventory, particularly in China which has been the driver of global demand since 2009.

Chinese inventories remain as high as 18 months of fabrication demand, up from 16 months at the start of 2012 and and only 4 months in 2009, according to the research:

In 2009, China was still a net exporter of silver. Due to changes in export tax rebates and demand growth, China turned net importer of the metal in 2010. In that year, the country imported an average of 298mt per month. In addition, China added another 288mt per month of silver from mine supply and scrap, leaving the total monthly supply of metal at 586mt in 2010.

In contrast, China’s average monthly fabrication demand in 2010 was only 330mt per month, implying a monthly surplus of 256mt per month in the local Chinese market during that year. This, by implication, had to be taken up by investment demand or stockpiled by fabricators. And even though China’s imports have slowed from 298mt per month in 2010 to 166mt per month in 2012, the decline in imports was still not enough to stop the rise in metal within China.

The bank predicts the only way silver could reverse the slump is if Chinese fabrication and investment demand accelerate sufficiently to bring down stockpiles which continue to grow.

This scenario seems unlikely. While Chinese manufacturing data turned positive recently thanks to a mini-stimulus implemented by Beijing,  industrial activity in the country is still on course for slower growth than in the past.

Another bearish factor is the slide in the gold price: "Silver has a beta of 1.4 with gold, implying that, if gold moved lower, silver would struggle even more," according to Standard Bank.

Image by Eric Golub