This has been a horrific year for silver, with spot prices dropping close to the $20 level and shares of the iShares Silver falling by more than a third. Many silver miners have plunged even further. Yet even with many expecting further drops in gold prices, investors are wondering whether the price of silver in 2014 could actually buck gold's downtrend and move higher. Let's take a look at some of the factors that hurt silver in 2013 and see if they're likely to weigh on the price of silver in 2014 and beyond.
Source: Creative Commons/Armin Kubelbeck.
Where's the price of silver in 2014 headed?
As with gold, the Federal Reserve and its decisions on monetary policy will play a huge role in determining the direction for the price of silver in 2014. Although the declines in precious metals in April weren't necessarily linked closely to the Fed's prospective moves, silver prices definitely fell further in June when the Fed first started discussing its eventual tapering of its bond-buying activity under quantitative easing. With as interest rates rise, income-producing bonds look more attractive compared to non-income-producing bullion investments like silver, and some worry that will push investors out of the silver market and cause the price of silver in 2014 to fall further.
Price projections on silver
UBS 2014 estimate
Merrill Lynch 2014 estimate
CIBC 2014 estimate
Citi 2014 estimate
Commerzbank 2014 estimate
Source: Analyst projections.
Analysts who focus on the silver market seem uninspired by the prospects for the white metal next year. UBS recently cut its targets for the price of silver in 2014 by $4.50 per ounce to $20.50, citing greater economic stability around the world that will lead investors out of perceived safe-haven investments like gold and silver. UBS also cut its 2015 silver-price projections from $24 to $21, showing its expectation that the sluggish performance in the market will persist well into the future.
Demand from exchange-traded fund investors is a big variable that could cause big swings in the price of silver in 2014. Analysts at CIBC set a $19 price target on silver for year-end 2014 but warned that a change in ETF demand could send prices far lower in the interim. With gold, sales by SPDR Gold contributed to falling spot metal prices, as forced sales of bullion weighed on the market. Yet so far, iShares Silver hasn't seen a similar drop in its silver holdings, and that has some waiting for the other shoe to drop and push silver prices lower.
The bullish side of silver
Yet not everyone is bearish on the prospects for silver prices. Citi is calling for weakness in silver in 2014, but it expects a modest bounce in future years, with targets of $22.20 for 2015, $22.50 for 2016, and $23 for 2017. Merrill Lynch expects an average price of silver for 2014 of more than $23, with weakness early in the year followed by a climb to $25 by the second half of 2014. B of A in particular believes that rising industrial activity will increase that aspect of silver's demand, an attribute that gold largely lacks that could help silver prices disconnect from gold.
Commerzbank shares the bullish industrial theory on silver, expecting average silver prices of $21.50 in 2014 but $24.50 the following year. With industrial demand for silver having been weak in 2013, analysts expect stronger levels of activity to contribute to continuing demand from investors in supporting prices.
Mining stocks: a leading indicator?
Recently, we've seen renewed optimism in some silver-mining stocks, suggesting greater belief among investors about the positive possibilities for the price of silver in 2014. In just the past month, Pan American Silver has climbed 15%, with its decision to expand its La Colorada mine in Mexico pointing to the economic viability of its operations even with a $20 silver price. Meanwhile, Silver Standard Resources has jumped 20% in the past month, in part on news that it will sell off its Challacollo project in Chile to raise cash and take an equity position in buyer Mandalay Resources.
Still, one unknown for silver prices comes from the fact that for many miners, silver is a byproduct from production of other metals. As gold-mining companies make investment and operational decisions based on the price of gold, they have a direct impact on the supply of silver available in the market. As a result, you have to look beyond silver specialists like Pan American and Silver Standard and look at traditional gold miners as well.
Most analysts were wrong with their silver price projections in 2013, and you can expect the price of silver in 2014 to produce even more surprises. In the tug of war between the Fed and bullion prices, though, silver has industrial demand to count on that gold largely lacks. That could give silver a key advantage over gold in 2014 and beyond.
Should you pick stocks over silver?
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The article Price of Silver in 2014: How It Could Buck Gold's Downtrend originally appeared on Fool.com.
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