A recent commodity report published by ETF Securities highlighted the gathering investment case for silver. The findings suggest that the dynamics of the silver market currently stand in stark contrast to its more illustrious precious metals partner. Gold imports into China trailed off in the early part of this year, whereas silver showed a 22 per cent increase year-on-year. Though it's not clear the degree to which this upsurge in demand from the People's Republic is investment-led, exchange traded products accounted for around 70 per cent of readily accessible inventories by the end of last year. This represents an enormous step-up since the turn of the millennium.
But silver does have a much wider range of industrial applications than gold - and market fundamentals appear to be moving in its favour. The report points out that unlike gold, most silver utilised in industry is removed from the market permanently. Silver's current market price simply doesn't outweigh recycling costs. So while primary mining supply increased by around 3.8 per cent in 2013, overall supply dipped by 2.5 per cent due to a marked fall-away in the secondary metals market. Put another way: the ratio of mining supply to inventories has narrowed from 7:1 to 1.2:1 since 1990.
This is certainly worth considering given the use of the metal in consumer electronics, and other growth areas of global manufacturing such as the production of solar PV panels. The report also revealed that fabrication demand for the metal - a third of which relates to jewellery & silverware - increased by 6.1 per cent last year.
It's held that the silver price was dragged down in April 2013 because of its historic correlation with gold. With the US economy seemingly on the mend, safe-haven inflows into gold from developing countries have temporarily stalled. But silver's investment profile certainly looks more favourable. Improving industrial demand, together with the fall-away in recycling, and receding inventories point to potential upside for silver prices. And with gold trading at what we consider its new floor of $1,250 per oz (£744 per oz), there's less chance that the correlation will work against investors' interests again.
