Silver price: recent rally underpinned by gold strength and short covering

On June 26, Dr David Jollie, strategic analyst at Mitsui Precious Metals in London, spoke with iNVEZZ.com about his outlook for the price of silver and his assessment of its recent rally.

When asked what he thought had underpinned the advance, whether it was investor demand or demand from industry, Dr Jollie said:

“I think what we partly saw was that investor demand slowed down the silver price from its highs in 2011. What we have seen recently is more interest, particularly in gold, and part of that is off the back of some concern there might be higher than expected inflation in the US, and what the Federal Reserve might do about that. I think that’s a large part of it,” Dr Jollie suggested.

“A lot of the same factors have affected different commodity prices in a similar way. For instance, tapering in the US seems to have reduced some of the appetite for commodities in general. You can see that in gold and silver, but you can see it in corn as well, and a range of other things too,” he added.
Short covering was also a factor in the recent rally, according to Dr Jollie.

Dr Jollie said that he thought demand for silver was a “mixed bag”

“Where we’ve seen a selling of holdings in gold-backed exchange-traded funds, we haven’t seen the same level in silver ETFs. We can still see very good interest in coins and small bars for silver. Investor interest is relatively strong despite the price decline.

“The success of digital cameras has eroded very quickly demand for silver in the photographic sector. But actually, what’s left of that sector is rather more robust. We see that in medical demand and in professional photography. We have a seen a competition between a loss of demand from the photographic sector and additional demand from the photovoltaic sector. Both of these factors, one bearish and one bullish have declined in intensity. A lot of the thrifting in the solar sector has already taken place. So we are not seeing huge losses in demand. On the other hand, we don’t see fast enough economic growth to give us really strong industrial demand.”

On the medium term outlook for the precious metal

I think the experiment with quantitative easing in the US and elsewhere hasn’t reached its conclusion. There are a lot of assumptions on how QE works, and whether it would be inflationary, or inflationary for asset prices. But actually no one completely knows, and there is still residual fear that we might see substantial inflation due to QE, or because of competitive devaluation of currencies, or for a range of other things like austerity in Europe.

We are seeing the potential still for some inflation in the market, and therefore we are a little bullish on silver. We also do expect silver to be used more in industrial applications. It will find uses, but it just may take some time for those uses to come true. He sees the silver price at close to $24 a troy ounce by 2015.

Dr Jollie suggested higher oil prices could have a mixed effect on silver prices. Although, it was positive for safe-haven assets, expensive oil could dampen industrial demand.

As to whether gold or silver is likely to see the best performance going forward, Dr Jollie said it depended on the time scale.

“If we’re expecting a much happier economic environment, which would mean relatively stable or perhaps lower oil prices, I think that’s when you would expect silver to outperform gold.”