Will Falling Silver Production Start To Impact SLV?
Summary The price of SLV lost 9% of its value during 2015. Silver production may drop in 2015 — for the first time in over a decade. As the deficit in silver keeps rising, this could eventually start affecting the price of SLV. The silver market didn’t have a good year as the price of the iShares Silver Trust ETF (NYSEARCA: SLV ) shed over 9% off its value. The direction of silver will continue to be dictated by the direction of long term interest rates and U.S. dollar (among other things that silver investors look for when investing in the precious metal). But what about the changes in the physical demand and supply for silver? After all, the ongoing low silver prices contributed to the decline in silver production this year – perhaps 2015 will be the first year since in well over a decade, in which production won’t rise. Will this be enough to drive up the price of SLV? I have already addressed the recent rate hike by the Fed and its impact on SLV. Currently, the market isn’t convinced the Fed will raise rates by another 1 percentage point as its members estimated in the last FOMC meeting. The implied probabilities , as collected by Fed-watch, suggest the market projects only two hikes of 0.25 basis points in 2016. If the Fed wind up raising by only 0.25bp or not raise at all, this could bring back down long term interest rates and perhaps even depreciate the U.S. dollar – two shifts that could behoove the price of SLV. What about the changes in production? According to the Silver Institute the balance between supply and demand was in deficit (i.e. the demand was higher than the supply). And this has been the case for the past 12 consecutive years . This year’s deficit is expected to settle at 21.3 million oz – the lowest deficit in a decade. This decline in deficit is mostly due to net outflows from ETFs holdings and derivatives exchange inventories. Basically, as the demand for silver as investment diminishes, it helps ease the physical deficit. But there is also the matter of falling production that could increase this deficit. Up to 2014, production has been rising. This year, however, it seems production hasn’t picked up and perhaps even slightly declined. Among the top leading countries the produce silver: Mexico, Peru, China, Australia and Chile, according to one outlet , total production in these countries is slightly down for the year (up to August) – by less than 1%. So it’s still unclear how the year will end for the silver balance. But even if this year the deficit expands again, it doesn’t mean this trend will be enough to push up the price of silver. The high deficit in recent years including 2013 and 2014 hasn’t helped rally the price of silver. But perhaps this could also be a matter of timing. Eventually the deficit in supply-demand balance will matter enough to pull up the price of silver, especially as silver loses its shine as investment. When will this happen? That’s unclear. Therefore, for the near term it still seems that the direction of SLV will be govern firstly by the changes in the demand for silver as an investment tool and only secondly by the changes in supply and demand for physical silver. This means the direction of the U.S. dollar, other precious metals – most notably gold – and long term interest rates will set the pace for SLV. In the coming months, I won’t be surprised if the Fed takes a more dovish tone than it took in its recent statement, which could actually slightly pull up SLV. Finally, in the medium term, the growing deficit in silver – mostly driven by falling production and rising physical demand – may take a bigger role in moving the price of silver. For more please see: What’s Up Ahead for Silver in 2016?