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Silver Has Room to Move in 2012, With Mining Companies Along for the Ride

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Silver hit a five-month high this week, with one analyst saying it still "has more room to progress upward" this year.

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The price of gold may be garnering attention for its gain so far in 2012, but it's silver that's boasting the best performance year-to-date in the precious metals space.

Earlier this week, silver reached its highest price since last September, with the March contract moving above $37.00 an ounce to settle at $37.14 an ounce on Tuesday. As of Tuesday, the metal had gained more than 30% in 2012. On Wednesday, however, the silver price took a tumble, falling 6% by mid-afternoon following comments by Federal Reserve Chairman Ben Bernanke that reportedly didn't mention any further quantitative easing.

Jeff Wright, a senior research analyst covering metals and mining equities at Global Hunter Securities says that although silver saw some profit-taking and a lack of liquidity late in the fourth quarter of 2011, the last two months have shown strong demand for both silver and gold in general.

"What I've noticed, both in the physical commodity as well as the silver producers, is a trend where people are going back into both the physical as well as the mining companies that produce commodities," he says.

Over and above silver's appeal as a precious metal, on the industrial side, Wright says one factor helping silver at the moment is the perception that, with the slight uptick in US economic activity, inventories are being restocked and there will be more demand for silver as an industrial product.

Although the silver price fell 10% in 2011, last year, the average annual silver price of $35.12 per ounce set a record, up 74% over the 2010 average annual price of $20.19 per ounce, according to the Silver Institute.

"Silver's strong price performance last year owed much to the strength in investment demand, as well as growth in industrial demand, much of which is relatively price insensitive in the short-term," said Michael DiRienzo, executive director of the Silver Institute.

According to the London Bullion Market Association's analyst forecast for 2012, the average silver price forecast for the year is $33.98 an ounce, which compares to the actual average year-to-date price, as of February 29, of $32.45 an ounce.

Earlier this month, BNP Paribas increased its 2012 silver price estimate to $37.50 from $36.75, and to $52.00 from $49.75 per ounce for 2013, according to IBTimes, with BNP analyst Anne-Laure Tremblay noting that "silver tends to be driven by two main factors: the gold price and risk appetite."

"When both show a positive momentum, silver tends to outperform gold," she added.

But another analyst notes that silver could be open for a pullback. "Silver looks like it is rallying more with gold than on its own merit, in our view," said James Steel, chief commodity analyst at HSBC, according to Reuters.

In terms of where silver might top out in 2012, Wright says demand destruction from industrial users can really start to kick in around $45 or $46 an ounce, which he says the market saw in 2011 when the silver price approached $50.

"There were smelting companies that did not want to take more physical delivery because of the risk, the hedge, there were end-users that were looking for alternatives," he says.

"The best of both worlds for a silver producer or silver investor is a long-term rally, incrementally, over time that gets silver to the levels they're looking for and if they're looking for above $50, you need to have that over a long period of time so the end users have time to, not only psychologically, but realistically, adjust to those inflationary pressures," he adds.

But although there are upside risks, Wright says he does not believe silver is near that level now.

"Between $36 and $37 where we are today, silver has more room to progress upward over the next six to nine months, during 2012 and onward," he says.

Silver stocks are also getting in on this rally, after a difficult fourth quarter of 2011.

Pan American Silver (PAAS) for example, fell more than 15% in the fourth quarter, but has gained it back so far in 2012. Silver Standard Resources (SSRI) was down more than 21% in the last three months of 2011, but has climbed 20% over the last two months (to February 28).

"They're not approaching 52-week highs, but they're certainly in a nice recovery over the past 30, 60 days, since the beginning of the New Year. I think they have room to run, I think they'll continue to move higher based on the higher price of silver," says Wright.

The iShares Silver Trust (SLV) is up 24% so far in 2012.
No positions in stocks mentioned.
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