Why The Silver Bear Market Is About To End

After three years of declining silver prices, Jeff Clark from Casey Research believes the bear market is coming to an end. In particular, he is looking at several data points which he explains in this article.

First off, from an historical perspective, it seems that we have had 7 bear markets over the past four decades. Four of them lasted longer and three were shorter. Four declined less than today; two were about the same; and only one was significantly deeper.

Silver_Bear_Market_Nearing_Exhaustion

Over the past 40 years, there has been no bear market that would extend the low past this October. It seems safe to conclude that the end of the down cycle is in or close.

Below are several data points which signal that current prices cannot last too much longer.

1. The US Mint (Still) Can’t Keep Up with Demand

The sharp drop in the silver price in 2013 unleashed a wave of pent-up demand for silver coins. Look at the response from investors.

US_Mint_Silver_Coin_Demand_1986_2013

The question this year is if those record levels could continue to be supported. The first quarter is over, so it is difficult you the answer.

The US Mint sold 13,879,000 ounces in Q1, 2.4% less than the 14,223,000 sold in the first quarter last year. Here’s the monthly breakdown:

  2013 2014  Gain/Loss
Jan. 7,498,000 4,775,000 -36.32%
Feb. 3,368,500 3,750,000 11.33%
Mar. 3,356,500 5,354,000 59.51%

 

January’s 36% decline from the prior year looks big, but it’s not what you think: the Mint didn’t begin sales until the end of the second week of the month. The monthly total thus reflects only 2.5 weeks of sales.

And March sales were the fourth-biggest month ever. Add in April’s sales figures and the US Mint is now on pace to exceed 2013 totals.

2. Silver ETFs Have Net Inflows (Again)

You might remember that silver ETFs’ holdings were largely flat last year, unlike the mass exodus seen in gold funds. The pattern is continuing this year.

Holdings in silver exchange-traded products (ETPs) have risen 3.5% year to date, an additional 17.5 million ounces. In fact, the net purchases by silver ETPs have totaled $354 million YTD, the largest influx of all commodity ETPs!

Meanwhile, gold-backed ETPs have seen sales of 500,000 ounces, about a 1% drop.

3. Jewelers Love Low Prices

Low silver prices have led to increased silver jewelry purchases.

As just one example, the UK reports that silver jewelry sales jumped 40.4% in February, to 351,791 items.

4. India Just Won’t Stop Buying

India imported 5,500 tonnes last year, 180% more than 2012. Imports comprised 20% of all global demand.

Last month’s silver imports were 250% lower. This was mostly due to the recent increase in import duties, and the fact that six banks got permission to import gold, which would soften purchases of me. This could partly explain why silver price has struggled.

But as long as politicians keep gold restrictions in place, Indians will keep buying silver.

5. China: More Silver for Solar

Chinese imports of silver rose drastically in February, up by 75% month on month and 90% year on year to 358 tonnes, the highest since March 2011. Though lower the following month, March imports were up 16% year over year.

China’s solar industry is growing explosively. In 2009, it represented about 0.2% of the global market; this year, it’s estimated to be one-third.

It’s interesting to note that my price rose in February and fell in March, which suggests that Chinese demand affects my price, too.

6. Supply Sources Are Concerning

So far, suppliers have managed to meet demand. However, there are dark clouds on the horizon…

  • Very little excess supply is expected this year, as production is projected to remain flat, and demand for me shows no signs of letting up.
  • Solar power accounted for 29% of added electricity capacity in America last year. “More solar has been installed in the US in the past 18 months than in 30 years,” says the US Solar Energy Industries Association. “Eventually solar will become so large that there will be consequences everywhere.”
  • Supply from recycling will probably be weak, because it’s not cost effective to recover every tiny bit of silver from cellphones or prescription eyewear or casino chips. One report says that Americans threw away 130 million cellphones last year, containing over 46 tonnes.
  • Several major base-metals mines are expected to be depleted over the next several years. The problem is that two-thirds of silver is a byproduct from base-metals operations—if their output falls, there will be less of silver, as well.
  • The Silver Institute says that demand for industrial products made from silver continues to grow.

 

By Jeff Clark, Senior Precious Metals Analyst

Learn about the three best ways to invest in silver, where and when to buy physical silver, and how to find the best silver stocks, in the free 2014 Silver Investor’s Guide.

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