Silver forecast and analysis for Q1 2016

Feb 16, 2016 - 10:39 AM GMT
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Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Jan 2016.

Below is the Silver report, to download a PDF copy of the full report covering all the metals in pdf form click here.

Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.

Silver – Possible short-covering rally

Summary

Silver fell for a third straight year in 2015, falling 12 percent to its lowest since 2009. It continued to come under downward pressure in the fourth quarter, dropping five percent, in a challenging macro environment and amid disappointing industrial demand and poor investment sentiment. But the metal should enjoy a recovery in the current quarter, trading in a $13.80-14.95 range – a rise that reflects improved investor sentiment – before it faces renewed downward pressure later in 2016 due to weaker industrial demand and lower gold prices.

Silver Price Chart 2012-16 - FastMarkets Quarterly Metals Report Q1 2016

Overall trend – Investor sentiment, which tends to be influenced positively by gold prices and negatively by US real interest rates, should be the main driver of silver over the next three months. Since we expect gold to rise, partly due to an overstretched spec short positioning and with real interest rates to move lower due to the resurgence of risk aversion amid heightened geopolitical tensions, we believe sentiment in the silver market will improve. This should translate into ETF buying after a wave of selling last year, combined with a pick-up in net speculative long positions on Comex after a huge fourth-quarter fall. But beyond that three-month horizon, we expect renewed weakness in prices because upward pressure from jewellery demand, especially in Asia, and tighter mine supply will not be enough to offset downward pressure from weaker industrial demand due to slowing economic growth, particularly in the EMs, and thrifting in key sectors such as the photovoltaic sector.

Silver Chart - silver ETF holdings and spot price - FastMarkets Quarterly Metals Report Q1 2016

ETF investors sold 181 tonnes in the fourth quarter after liquidating 236 tonnes in the third, bringing net outflows to 506 tonnes for 2015 compared with outflows of 181 tonnes in 2014 and 82 tonnes in 2013. ETF redemptions have not been that large on a percentage basis, unlike in gold, which suggests most investors are still in it for the long term.

silver Chart - Commitment of traders - Spec positioning on COMEX - FastMarkets Quarterly Metals Report Q1 2016

Money managers reduced sharply their net long positions in the fourth quarter of last year although the net spec length did not retest its all-time low from July 2015. The high level of gross shorts suggests a short-covering rally is likely in the first quarter.

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