Silver Prices Slip in 2014's Q1 but Consumer Demand Still Solid

By Diane Alter, Contributing Writer, Money Morning • March 31, 2014

Spot silver prices rose $0.07, or 0.4%, to $19.86 an ounce midday Monday as precious metal traders and investors gear up for a busy week ahead.

Market participants remain guarded, with a spate of U.S. economic data flooding in as the week wears on. Capping the busy week will be Friday's closely watched March jobs report.

Meanwhile, Monday caps the end of 2014's first quarter.

The white metal started 2014 with sterling gains, up as much as 16% earlier this year. But March was particularly painful for silver investors, with the most-active contracts down 6.5% for the month. That left year-to-date and quarterly gains up 2.5%.

That is, however, still comfortably better than year-to-date performances for the three major benchmarks. Thanks to Monday's stock market rally, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq will close out Q1 flat instead of down.

Silver has indeed had its ups and downs over 2014's first three months. Last week was a punishing one for silver, with white metal futures experiencing their longest slump in 13 years. Until Friday snapped the trend, silver had suffered a nine-session losing streak.

Fueling the latest tumble were signs of an improving U.S. economy, a declining Chinese economy, reduced hedge fund stakes, and waning geopolitical woes.

Here's a closer look.

Silver Prices in March 2014

• Since March 19, silver prices have given back 5.4%. Stoking silver's sell-off were comments from U.S. Fed Chair Janet Yellen. Amid signs suggesting a recovering economy, the central bank chief said its bond-buying program remains on pace to end this year and an interest rate hike could come in Q1 2015. That was a sharp blow to silver prices, as quantitative easing and rock-bottom interest rates have been catalysts for precious metals.

• Also weighing on silver is liquidations from hedge funds and money managers. Bullish bets from "smart" money players dropped to a one-month low in the week ended March 15, according to U.S. government data. That marked the third consecutive week of declining pro silver wagers. Additionally slipping are holdings in the biggest exchange-traded fund backed by silver. iShares Silver Trust ETF (NYSE Arca: SLV) holdings have slid 5% in the last 12 months.

• Some 50% of silver is used in industry, making the metal especially sensitive to any signs of worldwide economic slowdowns. There have been several recent signs pointing to slowing economic growth in China, the world's second-largest economy and the world's biggest metal consumer. Last month, China's manufacturing growth fell to an eight-month low. The Asian nation's purchasing manager's index tumbled to 50.2, its third straight drop.

• Silver prices headed higher in the weeks leading up to the March 23 Ukrainian vote, as investors stocked up on the safe-haven, store-of-value asset. But after citizens voted in favor of allowing Crimea to leave the country and join Russia, tensions appeared to ease. That took some of the "fear" impulse off the investor flight to safety.

But these short-term hits to silver prices haven't derailed its long-term value. And that is reflected in the continued robust demand for physical silver.

Physical Silver Demand Still Strong

According to the most recent update by the U.S. Mint, American Silver Eagle sales hit a new record in March.

Sales of the popular U.S. Silver Eagles reached 4,476,000 on March 28. That surpasses the March tally sold last year by more than 1 million - and the Mint still has a final update to perform today (Monday). Even without including Monday's update, sales in February and March are up 1.5 million year over year.

Additionally, global demand for physical silver has become so frenzied that a Singapore retail supplier of coins and bars just opened a new 600-metric-ton vault. That's the second sizable silver storage facility to be built in the Asian region in less than six months, with more likely to come.

Silver will continue to be a popular investment for the same reasons it has always been a favored asset: irresponsible government spending; over-accommodating global central banks; inflationary fears; always simmering (somewhere) geopolitical tensions.

Moreover, in a U.S. stock market that's no longer looking cheap, bargain-priced silver looks like an attractive, inexpensive bet.

Up Next: Palladium prices have risen, just as we predicted five months ago. But a number of factors are pointing to an even bigger price surge on the way...

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