Investors lose enthusiasm for precious metal silver

For the third time in as many years, the annual average New York (Handy & Harman) price for silver in 1990, at US$4.82 per oz., was lower than for the previous year, the Silver Users Association of Washington, D.C., reported. The group said a similar occurrence has existed in eight of the last 10 years for the metal, which was recently trading in the US$3.85 range. New mine production has been more than sufficient to offset industrial demand and lower amounts of silver provided by scrap and other secondary sources, the association noted. Also, investors have not been overly enthusiastic about the precious metal.

“The weakness in investor demand comes somewhat as a surprise in view of past responses to world tension as the market awaited the impending Middle East conflict during most of the second half of 1990,” said the association.

“A lower inflationary pressure during this period, caused in part by the poor domestic economy and the beginnings of similar conditions overseas, seemed to override influences from the war threat.” From London, international securities firm Shearson Lehman Brothers noted, in its Annual Review of the World Silver Industries 1990, that silver peaked in February last year at US$5.36. A rally did develop after the August invasion of Kuwait by Iraq, but it could not sustain itself. The metal averaged US$4.83 last year in London, down from US$5.56 in 1989.

For 1991, the securities firm expects the annual average silver price to decline further, “by up to 15% in nominal terms, which is closer to 20% in real terms.” Shearson’s “best estimate” is a US$4.10 average for 1991, and a US$4.50 average for 1992.

“The vast majority of supply is price-elastic; there are up to 20 years of supply of above-ground stocks (both ‘visible’ and ‘invisible’) and the market continues to generate a year-on-year surplus,” wrote Shearson.

“Both supply and demand will increase in 1991 but the slowdown in economic performance will hamper offtake growth and the 1991 surplus will be larger than that generated in 1990. The position is expected to be marginally improved in 1992 but supplies will continue to outstrip demand.” Shearson points out that the relationship between gold and silver has effectively broken down (except in India). The gold-silver ratio nearly reached 100 in 1990, and the securities firm sees no reason for the high-ratio pattern to be altered in the coming months.