TORONTO (miningweekly.com) – True to its nature, volatile silver prices have underperformed the base and precious metals complex in recent months, underpinned by rising output and lower investor and industrial demand, a new Bank of America (BofA) Merrill Lynch Global Research report has found.
The banking group noted that silver’s volatility relative to the S&P500 index had been increasingly visible in the gold:silver ratio, which had been rising towards levels not seen since the 1990s.
“Keeping in mind that both industrial and investor demand are important for silver, we believe the headwinds have emanated from both sectors,” the Global Commodity Research team stated.
BofA analysts said China’s silver imports had tapered off in the past couple of years, owing to ongoing weakness in manufacturing and investment activity.
Jewellery demand had been somewhat disappointing, while photovoltaic installations were weak too, particularly in 2014, although they had rebounded this year, BofA said.
Investment demand had also been muted, which was influenced, to some extent, by the losses especially retail investors sustained when the metal dropped from $50/oz.
Looking beyond China, physically backed exchange-traded funds had virtually seen no inflows since 2013 – in fact, the risk that ongoing elevated assets under management at these vehicles might be liquidated given lacklustre markets was perhaps the single biggest risk to silver in the near term, the team advised.
BofA warned that one of its silver price models suggested the metal could fall to $12/oz in the coming weeks. “In our view, the upcoming US Federal Reserve rate hike, now scheduled for December according to our economics team, is a formidable obstacle to silver, partially because US inflation has so far remained subdued.
“Having said that, we note that average hourly earnings increased by 2.5% year-on-year in October, partially because the labour market is approaching a nonaccelerating inflation rate of unemployment.
“We follow this development closely given reflationary environments can be bullish for silver; in fact, a pick-up of inflation, accompanied by a reacceleration of global economic activity could help silver bottom out as we move towards the second half of 2016,” BofA said.
The silver spot price in New York on Monday lost more than $0.20 /oz to $14.49/oz.