By Prieur du Plessis, on June 15th, 2011 posted in: Investment, Silver 8 people had their say - chime in!

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I am on record calling the silver market a Hunt Brothers type of market a few days before the market crashed. Well, it has happened. After soaring to a peak of $49.79 per ounce on 26 April, the silver price crashed to a low of $33.01 on 18 May.

With silver trading at a notch below $35, the question is: whereto now? In my analysis of the platinum market I compared the platinum price after the Tohoku quake in March this year to the platinum price after the Kobe quake in 1995. I did the same with the silver price, and wow, see what emerged!

Sources: I-Net Bridge: Plexus Asset Management.

The silver price reverted to the levels prior to the Tohoku disaster and has since tracked the price movements of the Kobe disaster. It is most interesting to note that the silver price took off a few days after Japan’s twin disaster. Why? I ask myself.

Sources: I-Net Bridge: Plexus Asset Management.

The only argument I can come up with is that sudden demand caught the market seriously short. This sudden demand could have emanated from the crisis in the MENA region as the affluent people in those countries took refuge in silver as a store of value that they could move across borders. In addition to that, investors probably took fright at the jump in energy prices as a result of the MENA situation and rushed into the silver market. I think the earthquake in Japan perhaps led to fears that silver scrap recovery could also be severely hampered as the annual scrap recovery is equivalent to 29% of annual mining production.

It seems to me that, as in the case of industrial metals, the outlook for silver is heavily dependent on China. China’s fabrication demand for silver amounted to 21% of world fabrication demand ex coins last year. The country’s fabrication demand over the past five years has grown in line with the GDP at a rate of 11% per year. At a growth rate of 9% per year it means that China’s fabrication demand will swell by 88 million ounces from the current 163 million to 251 million ounces by 2015. Mining production over the past five years has grown by 4% per year. If I assume that the growth rate will be maintained, it means the country’s mining production will rise by 22 million ounces from 98 million ounces in 2010 to 120 million ounces by 2015. A net shortfall of 66 million ounces! Yes, that excludes scrap recovery and investment demand.

Sources: CPM; Silver Institute; Plexus Asset Management.

China used to be a net exporter of silver in the past mainly due to sales from government stockpiles. The situation was reversed in 2007, though, and the country’s imports are currently around 11% of total world supply.

Sources: CPM; Silver Institute; Plexus Asset Management.

From my research a very interesting fact came to the fore. The CPM Group’s seasonality index for silver has a very close relationship with the seasonality of China’s CFLP manufacturing PMI! That explains the importance of China in the world silver market.

Sources: CPM; CFLP; Li & Fung: Plexus Asset Management.

Continue reading The case for silver: Buy!