Silver investment demand to grow in importance

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Interviewer: Geoff Candy
Posted:  Tuesday , 30 Oct 2012

GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Metals Weekly podcast. Joining me on the line is the founder and head of research at GoldCore, Mark O'Byrne. Mark we wanted to talk to you about silver because silver prices fell roughly speaking, 4,5% this week and clearly there's been a lot of talk about what's been going on, and perhaps some sense of fatigue setting in in terms of quantitative easing particularly on the gold side. This has perhaps fed into silver to some extent as well. How do you see the lay of the land with regards to the silver market at the moment?

MARK O'BYRNE: As you said it was down 4,5% this week and in the month of October we are actually down 6,7%. But we do see it as a correction within a longer term secular bull market for both gold and, indeed, the silver market. Basically both gold and silver had good moves up in the August and September periods. And then as we entered into October, which is traditionally one of the weakest months for gold and indeed for silver,  we actually warned coming into the end of September that if there is to be a correction it's most likely to be in October and that has materialised. But, we do believe that this is short-term weakness and that the long-term fundamentals will drive the gold and silver market prices higher in the coming months and particularly because November is one of the strongest months for both gold and silver. So, we do believe though we're probably not near the lows. I think we'll possibly hit the lows in the next week or two and then we're in for a period of strength in November. But, remember December, January and February are traditionally quite strong months for precious metals and I think we may see another intermediate peak coming into March 2013.

GEOFF CANDY: Now you talk of these traditional peaks, how much of that is related to jewellery demand out of Asia and clearly in a year where we've not seen particularly stellar growth in that sector of that market, given the high prices, especially in the likes of rupee terms., how does that impact on precious metals prices and in particular on silver?

MARK O'BYRNE: Yes, traditionally demand for jewellery in Asia, particularly from India, has been a fundamental driver and the Indian festival season in particular with regards to gold was a driver of that. And that may have led to the strength that you see in the month of November because we're coming into that month again and then obviously more recently since the liberalisation of the Chinese gold market, the Chinese demand coming into the Chinese New Year is another factor that people are believing is exerting pressure on the price coming into year end. So, I think that's still a factor, but, possibly less of a factor there than it was  before.

When you talk exclusively about jewellery - Asian demand has changed so much and there is obviously more coin and bar demand from Asia and I suppose Asians in general are becoming a little bit more sophisticated in the way they buy gold and they're trying to buy it in more cost effective ways oftentimes and also obviously we have the advent of the ETF and indeed the advent of many other types investment vehicles whether it be digital gold or gold certificates which have become more popular in the western world. So the jewellery demand is still a factor but it seems to be more of a factor whereby it's almost supporting the price on the dips. It's not what is driving the price on to record levels. It's just more an underlying support for the marketplace and we believe that will continue to be the case because the Chinese and particularly Indian buyers tend to be much more price sensitive. They seek value and tend to buy in the dips whereas our  experience of western buyers is, unfortunately, they do tend to buy near intermediate highs and they aren't very good at buying on the price corrections.

GEOFF CANDY: That does beg the question though then, are we perhaps seeing over time either a flattening out of the cycles to some extent or a shift in what is the traditionally higher or better performing ones and those that aren't?

MARK O'BYRNE: I don't know. Possibly from India because obviously the amount of gold ownership in India is huge - they are the largest owners of gold in the world, so it's a very developed marketplace. But China on the other hand has a similar population of nearly 1.3bn people if you include the Chinese diaspora and its interesting because the per capita consumption of those 1.3bn people is increasing very sharply but from a near zero base because they were banned from owning gold from 1950 to 2003. Their per capita ownership levels of gold are still nowhere near the levels seen in India. So it is believed in time that they will reach levels seen say by their compatriots in Hong Kong and by expats in Singapore and around Asia. Gold is very deeply ingrained in the Chinese psyche because of their experience of hyperinflation within the lifetime of many Chinese people. So I think it's very difficult to say but I think the Asian demand story is never going to go away. It may decrease from the record levels seen recently but I and I think most analysts would be surprised if it decreased a whole lot, especially given the uncertainties that are out there with regards to both the Chinese and Indian economies and indeed the global economy.

GEOFF CANDY: I want to get into those fundamental factors as well in just a second but in terms of silver particularly and the other side of the silver demand coin outside of investment, outside of jewellery, it is the much more industrial metal than perhaps gold as a precious metal as well, and we have seen a fairly large over supply of in the photovoltaic market as well, that clearly must have had some effect - how do you see that playing out as a demand for silver and in general how it would impact prices?

MARK O'BYRNE: Well this photovoltaic demand is interesting because there have been huge increases in demand in that sector (the solar energy sector) and that demand has come off a little. The share price of a lot of these solar energy companies have gone to the wall and the share prices have come off quite significantly. I think there was a nascent bubble there and that demand has fallen as you say, but I do think that long-term there is likely to be a degree of demand in the photovoltaic sector. But, it may fall from these levels but I think there will always be a base amount of demand in that sector.
And, while people have tended to focus on that sector more recently, it is important to note that silver is still used in huge amounts of industrial applications. People would be amazed at the little bits of silver that are in microwaves and fridges and all sorts of everyday appliances. It's also used massively in the medical sector in an increasing number of applications, there's a huge amount of new, different devices, silver is being used basically in these medical applications because it has anti-bacterial properties that have been known throughout history and even the US army has developed some of the clothing that's used by some of the US military personnel has little particles of silver because it helps the soldiers out in the field who are basically at risk of... you know, if they're wearing these clothes for long periods of time, sweating a lot there's a risk of disease... so basically you have surgical gowns, draperies and indeed actual medicine itself so that is a sector that is very interesting. But more importantly I suppose we will probably go into this now, investment demand is becoming if not as important, I think in time it may become as important as the industrial side and obviously in the 1980s and 1990s after the silver bubble burst demand was more on the industrial side and less investment demand but that shift has begun to change and will continue to see that change in the coming months and years.

GEOFF CANDY: How much of that has to do with the fact that gold prices are so much higher than perhaps they were in the past?

MARK O'BYRNE: I agree absolutely that is a factor, particularly in Asia, it is seen as poor man's gold, more so than in the west. So there is demand that we're seeing, particularly in India, but in other Asian countries as well, people increasingly find it hard to hold gold in any sort of quantities so they are buying silver because the ratio is roughly 53, 54 to 1 as we speak. So, long-term the ratio is 15:1 because geologically there are 15 parts of silver to one part of gold, so we believe long-term that the ratio will gradually return to that level of 15:1 of the very long term because a huge amount of silver has been used in industrial applications in the last 100 years whereas obviously all the gold that's ever been mined continues to be recycled at a much higher level. So that is part of it and there is some money in the western world, investment money is looking at silver as undervalued vis a vis obviously gold above its nominal high from 1980, whereas silver continues to be well below its nominal high for 1980 so I think that will continue to lead to investment demand internationally.

GEOFF CANDY: Where do you see prices going?

MARK O'BYRNE: Well we're not jumping on the bandwagon. As early as 2003 we said that we believed silver would go over $50 per ounce . So $50 per ounce was the nominal high in 1980. We said it would go above that price in 2003 - it reached there a year and a half, two years ago and we believe we'll get back above that level. But we also said that gold and silver would reach inflation adjusted highs and gold's inflation adjusted high is $2,400 an ounce and silver's inflation adjusted high is $140 per ounce and we see no reason to change those long-term forecasts. Indeed the amount of money that's been printed in the world today would suggest that if you've got a parabolic spike as we saw in 1980, prices could go much further higher on the upside you know...

GEOFF CANDY: Just quickly to close off with - what is likely to be the next catalyst for silver prices either on the downside or the upside?

MARK O'BYRNE: Well I think it is the fiscal cliff. Once this election is over, the folks will turn to whether the US Congress can get their act together and address the fiscal cliff, and many people are concerned that even if they do manage to quit the political squabbling, and achieve a degree of consensus, that there are concerns that the scale of the fiscal problems in the US in terms of the national deficit and indeed of the massive unfunded liabilities which are between $50tr and $100tr, there is a risk that this is, I hate to call it insurmountable, but it's a momentous task that they ahead of them, and I think once the markets begin to focus on that again I think the dollar will come under pressure and indeed I think all fiat currencies will come under pressure in the coming years given the degree of fiscal imbalances in most western economies and I think that that bodes well for both gold and silver in the final two months of this year and into 2013 and indeed in the coming years I do think this is a long-term - people talk about the super-cycle in commodities, many commodity markets and indeed a lot of markets have long-term 15 to 20 year cycles in prices. And I think quite possibly that's what we are witnessing in both the gold and silver markets.

GEOFF CANDY: And we're about 10 years in at the moment...

MARK O'BYRNE: Exactly. We are 12 years in so, who knows. I mean we try not to get into price predictions and try and predict the future because it's absolutely unknowable, but we do think price will not peak until at least until 2015 - I think sometime between 2015 and 2020. Hopefully at that stage, you know many of the fiscal monetary problems that are... today will have been addressed and we'll have come through the worst of the crisis and only at that stage I suppose will we have more clarity on the longer-term outlook...