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Industrial Demand, Economic Growth Keys to Long-Term Silver Story

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Analysts forecast a lower silver price in the short term, but is industrial demand set to boost the metal's prospects over a longer time frame?

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The near-term outlook for silver took a hit this week, as several major banks lowered their 2013 and 2014 forecasts for the metal. But long-term, say analysts, an improving economy and industrial demand could provide silver with some much-needed support.

At the moment, silver is trading at lows not seen since 2010, with July silver falling to $18.59 on the Comex division of the New York Mercantile Exchange on June 26. Year-to-date, the iShares Silver Trust (NYSEARCA:SLV) has fallen 39%.

With the silver price on the decline, mining stocks have also recorded a dismal first half of the year. Pan American Silver Corp. (NASDAQ:PAAS) is down more than 44% so far this year (to June 26), while Silver Standard Resources Inc. (NASDAQ:SSRI) has tumbled more than 62% in 2013. Similarly, First Majestic Silver Corp. (NYSE:AG) is down 56% year-to-date and Silver Wheaton Corp. (NYSE:SLW) has fallen 46%.

Investment banks are seemingly not expecting the silver price to climb anytime soon.

According to Marketwatch, UBS AG cut its three-month forecast for silver by nearly 27% to $20.50 an ounce earlier this week, expecting the metal to average $24 an ounce this year and $25 an ounce in 2014, as a result of silver "takings its cues" from gold.

HSBC, Credit Suisse, and Deutsche Bank have also lowered their forecasts for the silver price this year, while Morgan Stanley announced this week that it is slashing its silver-price forecast for 2013 by 14% and by 29% for 2014.

"With investor demand for safe-haven assets waning against the backdrop of a strengthening US dollar and rising US bond yields, market conditions for gold and silver have become markedly less favorable," Morgan Stanley said in a note, via Reuters.

Heading into this year, analysts surveyed in the London Bullion Market Association's 2013 forecast predicted an average silver price of $33.21 for 2013.

Peter Fertig, director of QCR Quantitative Commodity Research in Germany noted in the LBMA 2013 forecast that an "improved economic outlook in major parts of the world should be supportive for silver."

However, he tells Minyanville that as forecasts for global growth from international organizations have been revised down, this comment now applies more to a medium- or even long-term horizon when global growth accelerates again.

For the time being, he says, silver is being dragged down by gold, which he says "is no longer the darling of analysts and institutional investors."

But over the long run, explains Fertig, industrial demand -- which the Silver Institute and Thomson Reuters GFMS World Silver Survey 2013 says has accounted for 45% of silver demand over the last two years -- is probably a factor in favor of silver.

"The costs of mining silver play a stronger role as a price floor compared to gold. Increased industrial demand will prevent silver falling below production costs for a longer period of time. Thus, silver could weaken further in line with gold as sentiment among institutional investors is bearish. But in the long-term, prices should recover again," he adds.

Charles Gibson, director and mining sector head at Edison Investment Research in London explains that, as silver has aspects of both a safe haven store of value and an industrial commodity, it tends to underperform gold but outperform other metals at times of economic crisis and vice versa in periods of benign economic growth.

"Currently, the market appears to be on the cusp of a switch in thinking from an unconventional economic scenario (eg, QE3 and negative real interest rates) to a more conventional one (eg, positive real interest rates) – hence the turbulence," he says.

Gibson says he is cautiously optimistic about both gold and silver in the medium term, with a long-term forecast for silver of US$28.15/oz.

"I think that the catalyst to drive it to this price will be elevated inflation levels once the global and US economic recovery gathers momentum," he says.

"It is safe to say that, in the event of solid global economic growth, silver will outperform," he adds.

Twitter: @helenbnichols
No positions in stocks mentioned.
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