According to RBCCM, silver is likely to continue to perform in the short to medium term but supply side issues are likely to cap prices in the longer term.
While gold's record-breaking run through $1,500 an ounce has been impressive, it is silver's performance year-to-date that has caught many an investor's attention.
And, while just eight months ago, the ratio of silver price to that of gold was 68:1 eight months ago, at the time of writing the frequently watched measure sat at 33:1.
And, while there are some that expect the silver to continue closing the gap between it and its yellow sister, some, like RBC Capital Markets think that the next leg of the race is going to belong to gold.
However, the bank says the move is not going to happen in the short term.
"Our new silver price forecasts assume that the gold:silver ratio stays in the 40s:1 for the next several years. We do not expect gold to rally while silver falls, but rather we believe that two more likely scenarios would be either a pullback in both metals (with silver declining at a greater rate than gold) or gold outperforming silver during the next upward rally in both metals." RBCCM says.
Over the short to medium term, the bank remains rather bullish on silver for a number of reasons. Firstly, the bank is bearish on the outlook for the U.S. dollar as it expects "The U.S. Government and the U.S. Fed to walk a tightrope of fiscal stability, with potential difficulties in extracting the record liquidity that was injected into the system over the past couple of years." It says that these difficulties are likely to weigh on the performance on the currency and thus be generally positive for precious metals."
Secondly, the bank paints a rather bullish picture of demand, particularly investment demand, over the 1 to 3 year horizon.
While traditionally, silver demand has come predominantly from industrial uses, jewellery and photography, the rise of digital photography has seen silver demand from that sector wane. This, decline has, however, been more than covered by the rise in demand from silver ETFs, which grew to account for 17% of total silver demand in 2010, up from 15% in 2009 and 5% in 2008.
With the enhanced transparency of the various silver ETFs (which trade on several regulated exchanges around the world), both retail and institutional investors have shown a renewed interest in silver investing," the bank writes.
Adding, " For 2010, total silver ETF holdings grew by ~115 million oz, including 45 million oz for the SLV. Looking ahead through 2011, we expect continued strength, perhaps at similar levels to 2010, with our forecast of 125 million ounces."
As a result of these factors and largely stable supply, at least in the short term, RBCCM has revised its price forecasts for the metal.
It now expects silver to average $37.50 in the second quarter of this year, $34.14 in Q3 and $36.50 in the last quarter of 2011.
That said, the bank does have some "medium- to longer-term concerns due to increasing primary silver mine supply, which we believe could eventually cap the upside for silver prices."
According to RBCCM, primary silver production is expected to increase in the near future with a couple of large scale operations either currently ramping up or slated for start-up over the next few years, including: Tahoe Resources' Escobal project in Guatemala and Pan American Silver's Navidad mine in Argentina.
By-product production is also expected to increase over the next five years with the ramp up of Barrick's Pascua-Lama operation and Goldcorp's Peñasquito mine.
While some of this output will be offset by the closure of existing capacity, RBCCM says "These new primary and by-product operations could add over 100MM oz of annual silver production (+14% of global mine supply)."
It adds that, one also needs to take into account the role of China, which is difficult to accurately estimate given the preponderance of thousands of small producers.
CHINA MAY BE INCREASING ITS SILVER STOCKPILES
"China's stockpiles were created by an over-production of silver mining during the 1970s and 1980s. From the early 1980s, production expanded rapidly, so that by the end of the decade, mined output had substantially exceeded local demand" says the bank. "Given lower reported exports of silver for the last few years, in our view China has been either using silver production domestically or increasing stockpiles of silver. While we expect there has been a growth in domestic Chinese demand for silver, the increase in copper and lead/zinc concentrates imported to China for processing by smelters has, we believe, yielded much more silver by-product than domestic demand growth."
It adds, "While total global aboveground stocks may have declined to a few hundred million ounces of silver or less, our supply/demand forecasts suggest these levels may be sufficient to meet the demand gap for a number of years should they enter the market."
As a result of this, The bank believes that silver is likely to average $35 in 2012, before falling to $27.50 in 2013, $25.00 in 2014 and $22.50 in 2015.
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