Investors have grown accustomed to gold and silver being doormats. Over the last two years, the gold price has dropped 30%, while the silver price has been cut in half. Ouch!... and ouch! Well, let me tell you, I think both metals are set up to surprise to the upside in 2015, ESPECIALLY silver.
I'll make the bullish case for gold another time. Today, we'll look at three reasons silver is ready to rocket.
Force No. 1: Mom-and-Pop Investors Are Buying Hand Over Fist Sales of American Eagle Silver bullion coins hit a new sales record.
The U.S. Mint sold 43.5 million Silver Eagle coins this year, handily beating last year's record of 42.675 million coins.
And this happened even though the mint ran out of Silver Eagles to sell in November. Sales started again, but were expected to end this week as the mint ran out again!
Hey, how about the Canadian Mint? Sorry, they sold out of 2014 Silver Maple Leafs, too.
Clearly, mom-and-pop investors know a bargain when they see one.
Force No. 2: Industrial Demand Is Soaring Industrial demand for silver keeps ramping up. The Silver Institute expects silver demand to grow about 5% per year over the next few years. Already, industrial demand consumes more than two-thirds of the world's annual silver production, which leaves very little silver for jewelry, coins and other forms of investment demand.
The biggest growth opportunities are in photovoltaics (solar), automotive and ethylene oxide (EO). EO is used in the production of industrial chemicals. Longer term, just in photovoltaic solar panels, demand is expected to rise to 109 million ounces by 2018. That's up from 88 million ounces consumed in 2013.
Force No. 3: A Supply Squeeze So far, I've covered demand. What about supply? Well, that could really be under pressure in 2015.
HSBC forecasts that the supply/demand balance in silver will swing from a 3 million-ounce surplus in 2014 to an 11 million-ounce deficit in 2015.
"Should prices trade below all-in costs for a prolonged period, then producers could decide to shelve or delay future projects, which could limit long-term output," HSBC said in its report. "We believe this has already trimmed potential output in 2015."
A swing from a surplus to a deficit in silver from mines should go a long way toward lighting the fuse on silver's next big rally.
What We Don't Know Investment demand is, of course, a big unknown for silver. But two large sources of investor demand are as robust as ever: ETF demand here in the States and Indian demand oversees. Both are at record highs...and rising.
So far this year, ETFs have added 15 million ounces of silver to a bit over 630 million ounces. Remarkably, ETF silver holdings have been rising steadily throughout the last few years, despite a slumping silver price. In other words, demand for silver ETFs has remained fairly strong.
That's a very sharp contrast with the gold market, where waning investor demand has forced gold ETFs to dump their holdings.
Since demand for silver has remained strong throughout the precious metals bear market of the last three years, it is not hard to imagine that demand might strengthen if/as/when a new bull market takes flight.
Obviously, a lot could go wrong for silver. But the forces are clearly in place to push silver higher. Longer-term trends like growing industrial demand and robust investor demand - both here and abroad - are definitely in its favor.
Investors don't expect a lot out of silver in 2015. But bull markets often start when sentiment is terrible. And I believe that's exactly what we're seeing with silver right now.
All the best,
Sean Brodrick
for Free Market Café
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