Silver loses its shine as price falls

“For a precious metal, silver doesn’t seem very dear,” says Tatyana Shumsky in Barron’s. The price fell by 36% last year and has moved sideways in 2014, recently sliding back under $20 an ounce. Investors should not expect a rapid recovery.

Silver is a monetary metal, so it often tracks gold. But it tends to amplify gold’s movements in both directions, as the market is much smaller; last year gold fell by 28%.

The main problem now is that monetary policy is slowly returning to normal as growth improves, with the US Federal Reserve winding down its money printing, so higher real interest rates are on the horizon.

Tighter monetary policy should pre-empt inflation, while it also makes silver less appealing because it doesn’t pay interest.

Industries ranging from medicine to IT comprise around half of the demand for silver and the market’s focus will be on the plentiful supply, set to outpace demand for a sixth successive year. HSBC is pencilling in a 3.4% increase in 2014 while demand stays the same.

Geopolitical jitters could well give silver the odd fillip. But the overall fundamentals are discouraging. For now, at least, “silver has the worst story of all the metals”, says Adam Klopfenstein of Archer Financial Services.

  • Ellen12

    The fundamentals are good for silver and gold and both are undervalued and if ever there was a time for looking a gifthorse in the mouth, it’s here. FED’s QE pushed asset prices up, creating bubbles everywhere, with one notable exception in the last two to three years. What the market is gambling on is less to do with gold and silver losing on the back of tapering QE but that the fed continue to be in a position to manipulate the price of precious metals downward in their continued attempt to give the world the impression that all is fine with the US economy and the dollar. Deutsche Bank leaves the appropriately named ‘London fix’, on 13th May and no other bank wants to buy its interest while 20 lawsuits are pending against them relating to allegations on said ‘gaming and fixing’. The FCA also want to take a much closer look at the proceedings. More importantly, we are accustomed to rigging of markets in the financial sector since the LIBOR scandal. It won’t take much persuading for people everywhere to assume the FED do routinely rig the gold and silver markets to prop up the dollar because dishonesty is expected from them. The global incentive to continue to use the dollar as the international trading currency is being further weakened and I would guess we will be many more trades being done away from the dollar as time goes by.