Note the word pullback and not collapse.

Silver susceptible to a big pullback
Allan Seccombe

THE silver market is susceptible to the price falling sharply because it is already overpriced in an environment where supply is coming thick and fast, according to the Fortis Metals Monthly report.

“On purely fundamental supply-demand terms, silver is already beyond its reasonable value,” the report researched by the VM Group said.

“New mine supply growth is running faster than for many years, while offtake in the photographic and jewellery sectors is limp,” it said.

Silver producer Coeur d’Alene has started production at its San Bartolomé mine in Bolivia. The mine will produce six million oz of silver this year and nine million oz next year.

Coeur d’Alene said its Palmarejo project in Mexico would add 28% to its silver output next year, taking it to 23.6 million oz.

Speculative interest in the metal on COMEX and exchange traded funds was critical for the metal.

“Any weakening of sentiment among the investment community could see the price topple quite fast,” the report said. “The silver-gold link in price movements is currently firmly established. So, if gold does much better on the back of inflationary panic, then silver will too.”

The short-term outlook for the metal is a range of between $17 and $19 an ounce based on the afternoon London fix.

The silver price, which started the year out at $14.93/oz, ended slightly down in the second quarter at $17.65 against the first quarter at $17.99.

A weakening of the dollar in the closing days of the second quarter as the US Federal Reserve held back from an interest rate increase came to the rescue of both gold and silver which, on 25 June, were down 5.4% and 7.2% respectively, the report said.

"This was all the more potent as, up to that point, there was some expectation that the dollar's long decline could be over. Whether or not that is the case will to a great extent determine the price movement of both gold and silver in 2H 08."