2014 SILVER MARKET OUTLOOK

Transcription

1 214 SILVER MARKET OUTLOOK

2 Copyright CPM Group LLC 214. These reports are produced by CPM Group for distribution by Monex Deposit Company. The rights to distribution, reproduction, and redistribution rights are ceded to Monex Deposit Company by CPM Group for these reports. These reports are not for reproduction or retransmission without written consent of Monex Deposit Company. The intellectual content and property of these reports remain the property of CPM Group, and they are not for reproduction or retransmission without written consent of CPM Group. The views expressed within are solely those of CPM Group. Such information has not been verified, nor does CPM make any representation as to its accuracy or completeness. Any statements non-factual in nature constitute only current opinions, which are subject to change. While every effort has been made to ensure that the accuracy of the material contained in the reports is correct, CPM Group cannot be held liable for errors or omissions. CPM Group is not soliciting any action based on it. Information contained here should not be relied on as specific investment or market timing advice. At times the principals and associates of CPM Group may have long or short positions in some of the markets mentioned here.

3 214 Silver Market Outlook Page 1 This Is The Time To Buy The silver market in 214 will be a very interesting battlefield between investors who are selling and investors who are buying this metal. Over the course of 213 two competing trends in investor behavior emerged in silver, with some investors selling large volumes of silver and others buying larger volumes, as the price of silver fell in reaction to the first group s selling. These competing trends will play out against each other in 214. The direction of silver prices will be determined by the relative strength of each trend. The silver investment market was divided in 213 in a fascinating way. There was a surge in silver demand from some investors for coins and other bullion products. There also was an increase in silver held via exchange traded products. Silver coin purchases rose to a record level. Investors using ETFs added to their silver positions, even as other investors were selling large volumes of their gold ETF shares. Volumes of silver being stored for such investors rose sharply in numerous markets around the world. Other large investors meanwhile were selling 1, ounce bars. Estimated volumes are that around million ounces of industry standard 1, ounce bars were being sold by institutional and wealthy individual investors last year, even as other investors were stacking silver coins, medallions, and small bars at break-neck paces. The bulk of the liquidation by larger investors appears to be behind the market as of early 214, although the selling of 1, ounce bars is projected to continue at a reduced rate at least in the early part of this year. Investors meanwhile are projected to remain interested in silver coins and other smaller minted investment products. One of the interesting aspects of the demand seen in 213 has been investors buying silver Eagle and Maple Leaf coins in large volumes, a trend that shows no sign of abating in early 214. Why Would Someone Sell? The investors who were selling largely appeared to be making their decisions on shorter term trends. Prices peaked in 211 and moved sideways to lower after that. Investors who were trend followers, who had been buying silver because the price had been rising, began selling in earnest in 213. Other investors were shorter term opportunistic investors. These investors were cycling out of silver into U.S. stocks, which were rising at the time. Still other investors were selling silver because they had had over-blown expectations for silver s upward price potential. They had bought into marketing stories that the global financial system was going to collapse, that the dollar would be worthless, that inflation rates would skyrocket, and that banks would be collapsing by the hundreds. When none of these financially apocalyptic trends emerged over the past few years, these investors became disenchanted. These actions by these investors bear close consideration, because these investors have made several key mistakes in their investing behavior, and their mistakes are worth understanding and avoiding in 214 and beyond. These investors had expected too much of silver, and gold. They had unrealistic and improbable expectations, both of the global economic situation and of silver and gold invest- Silver Prices: Limited Downside Comex Silver Prices, Daily, From 1 January 2 to 7 January 214 $ / Oz $ / Oz

4 214 Silver Market Outlook Page 2 ments. As a result, their unreasonable expectations went unfulfilled, and they have grown disenchanted. That is unfortunate for them, because there are many economic, political, and financial problems still at large in the world, and they are likely to negatively affect stocks, bonds, and other traditional investments. Buying and holding silver as partial insurance and protection against these hostile developments still makes sense, and should be continued. Those investors who expected too much, were disappointed, and have sold their silver holdings are selling at the wrong time. Why Buy Silver Investment Demand: A Mixed Bag Silver Market Balance $/Ounce Net Additions Net Changes in Inventories 2 Price (LHS) Net Withdrawals p This last group of disenchanted investors stands in stark contrast from those investors who were buying silver in 213, and are continuing to buy in early 214. These investors are buying and holding silver primarily as a longterm hedge against economic chaos: inflation, unemployment, volatile stock, bond and currency markets, rising interest rates, renewed recession, stalemated and ineffective government, and a wide range of other economic problems that can and should be expected to cause investors pain in the years ahead. Additionally, the investors who were buying in 213 were taking advantage of lower silver prices brought about by those other, impatient and disillusioned, investors who were selling. The investors who were buying silver were not buying silver solely against a catastrophic economic failure, but also as protection against a range of lesser economic evils and as a portfolio diversifier. With more realistic price expectations than their apocalyptic brethren, these investors were not disappointed to see silver rise as high as $ in 211 and remain above $18. in the subsequent 33 months. In fact, they took the opportunity of the price declines in 213 to add to their positions. Investing in silver The latter group of investors appear to have gotten their silver purchases and portfolio management right. They have bought silver because, along with gold, silver traditionally has helped protect individuals wealth from the ups and downs of stocks, bonds, and currencies, help stabilize their wealth over the long run, and give them exposure to periodic periods of rising silver prices. Investors do well with silver in many ways, but two practices stand out. One is holding some portion of their wealth in silver, as a long term investment. Sometimes long term investors see prices rise so sharply that they Annual U.S. Mint Silver Coin Sales to Dealers Investment Demand by Major Investment Vehicle 2 Net Investment Demand Private Bullion ETPs Coins p Note: Bars represent gross investment demand.

5 214 Silver Market Outlook Page 3 take profits on at least part of their long-term holdings. They may sell some or all of their silver, or buy puts to protect against down-drafts in prices from historically high levels while still holding on to their metal. The other way that investors tend to do well is to be more opportunistic with some portion of their silver holdings, buying and selling based on shorter term moves. Remember that the first group of investors we mentioned above who had been selling silver last year were shorter term trend followers. The more nimble of these have done very well in silver, riding prices higher, then lower, and then higher again. The more sophisticated silver investors combine the longterm capital preservation practice of buying and holding silver with the shorter term practice of trading a portion of their silver holdings in a shorter term, more opportunistic fashion. Fabrication demand Fabrication demand rose to million ounces in 213, up 2.9% from 212. The primary driver of silver fabrication demand in 213 was an increase in jewelry and silverware demand, which rose to 4.9 million ounces, up 7.4% from 212. The decline in silver prices during 213 helped push silver demand higher from this pricesensitive sector, which uses more silver than any other industry. In addition to the decline in prices, demand for jewelry and silverware was positively affected by an increase in demand from India. Consumers in India increased their purchases of silver jewelry in response to the high domestic prices of gold. Various government restrictions on gold imports coupled with a weakening Indian rupee against the U.S. dollar pushed gold prices in India to near record high levels. Nearly all of India s gold demand is met by imports. There were no import restrictions levied on silver imports, which kept silver prices under control and made silver jewelry more attractive to Indian consumers. Demand for silver jewelry and silverware is forecast to continue rising in 214, as a result of weak silver prices. Growth rates in demand from India may not be as strong as it was in 213. There is a possibility that the Indian government will scale back some of the restrictions on gold imports, which could reduce some of silver s attractiveness relative to gold. That said, the price of silver is expected to move at levels last seen in 21, which is expected to boost demand for the metal from the jewelry sector. Silver demand from the jewelry and silverware sector is forecast to reach million ounces, the highest level since reaching million ounces in 23. Demand for silver from the electronics sector, which is the second largest source of silver fabrication demand, declined to million ounces in 213. This was a marginal decline of.21% from 212. The weakness in demand from this source was to some extent the result of a shift in consumer demand from desktop and laptop computers to tablets. Tablets contain a significantly smaller amount of silver than computers, making this development negative for silver demand, albeit computers only account for % to 1% of total electronics demand. Silver is used extensively in semiconductors for some of its distinct physical and chemical properties. There was an overall increase in demand for semiconductors during Fabrication Demand: On The Rebound Annual Silver Fabrication Demand 1, Photovoltaic 9 Imports into Trans Economies Other Countries 8 Other Uses Biocides 7 Superconductors 6 Electronics Jewelry & Silverware Photography , e Global Silver Demand for Jewelry & Silverware Fabrication South America Oceania North & Central America Europe Asia & Middle East

6 214 Silver Market Outlook Page 4 213, which helped to offset some of the loss in silver demand resulting from the shift in consumer demand from laptop and desktop computers to tablets. Silver demand from electronics is forecast to grow to a new record high of million ounces in 214. Silver demand from the photography sector continued to decline, reaching a record low 82 million ounces in 213. This was a decline of 8.6% from 212. Demand for silver from this sector has been in a declining trend since the turn of the century. An ongoing shift in consumer demand away from film photography and a reduction in the volume of photographs being printed on photographic paper is primarily responsible for weakness in silver demand from this sector. Demand from this source is forecast to continue declining into the foreseeable future, albeit at a slower pace than that seen in the recent past. In 214 demand for silver from the photography sector is expected to slip to 77.7 million ounces, down.2%. A variety of products and manufacturing processes use silver and many of these showed healthy growth during 213. Some of these sources of demand include solar panels, ethylene oxide catalysts, and biocides. Silver demand from the solar panel industry reached 3. million ounces in 213, up 12.7% from 212. The cost of producing and the selling price of a solar panel both have declined rapidly over the past decade. This coupled with a push by various governments to promote the use of solar panels is expected to benefit silver demand from this Fabrication Demand Annual Silver Demand for Photovoltaic Solar Panels Silver Demand for Electronics and Batteries p e Silver Demand for Ethylene Oxide Production Catalysts Silver Fabrication Demand for Photography 2 Replacement Demand New Demand 2 3 Graphic Arts X-ray Motion Pictures 2 1 Basic Photography p Note: 'New Demand' represents silver demand for new production capacity addedto global ethylene oxide production capacity. 'Replacement Demand' represents additional silver added to existing capacity after refining losses.

7 214 Silver Market Outlook Page source. Over the past several years there have been significant and successful efforts toward reducing the perunit use of silver in solar panels. Much of this thrifting is behind the market, however, which will help boost demand from this use going forward. Silver demand from solar panels is forecast to reach a record high 6 million ounces in 214, and is projected to more than double over the coming decade. Silver demand from ethylene oxide catalysts reached.3 million ounces in 213, up 24.% from 212. A combination of new production capacity in China coupled with replacement demand at existing facilities has helped push demand from this source higher in recent years. The major growth factor is the demand from new ethylene oxide manufacturing capacity, even though the majority of the volume comes from replacement demand. As the industry expands, the volumes of silver needed for replacement catalysts rises in a semi-permanent fashion. In 213 demand from new capacity additions reached 6. million ounces, up 9% from 212. Replacement demand, meanwhile, rose to 9.3 million ounces, up 2% from 212. Total demand for silver from ethylene oxide catalysts is forecast to grow to 21.1 million ounces in 214, up 37.8% from 213, as new plants are started. Total silver fabrication demand is forecast to rise to million ounces in 214, up 2.9% from 213. Total Supply Total supply declined in 213 to million ounces, down % from 212. Mine supply rose to a record high 76.2 million ounces in 213, up.7% from 212. The increase to record high levels was a marginal 4.8 million Total Silver Supply Weakens ounces increase over 212 levels. This increase was not enough to offset the weakness in secondary supply, however, which resulted in a decline in total supply of newly refined silver during 213. A significant number of mines that were being aggressively developed over the past five to 1 years have been mothballed due to the cyclical decline in commodities prices that began in the latter half of 211. To put this into perspective, about 2 million ounces of potential silver mine production capacity expected to come onstream within the next five years at the beginning of 213 were removed from the supply curve due to this factor, in CPM Group s projections at the end of 213. That said, various projects that started production in 212 and 213 and other projects that were in the late stage of development in 213 are expected to come onstream in 214. These new projects will ramp up production, which is expected to help boost mine supply. Mine supply is forecast to reach 72. million ounces in 214, up 13.8 million ounces or 2% from 213. Looking at silver cash costs only provides insight to the cost of mining % of silver mine production. The balance is produced as a byproduct of gold, copper, lead, and zinc. At these mines the silver production is a credit to the cost of mining the other metals. The rising price of silver over the past decade has increased the volume of primary silver production and encouraged investors to pour money into the development of silver mines. The improvement in primary silver mine economics over the past several years is expected to continue to boost primary silver mine production going forward. Even with the decline in prices since 211, silver prices remain high enough to support rising mine production. Annual Total Silver Supply 1,1 1,1 1, Net Exports from Tran. Econ. 1, Government Disposals 8 7 Secondary Mine Production p Silver Secondary Supply South Asian Exports Indian Scrap Demonetized Coins Old Scrap Nominal Silver Price (RHS) e $/Oz

8 214 Silver Market Outlook Page 6 Silver cash costs, weighted by production, averaged $1.4 in 212. Cash costs have increased at a compounded annual rate of 1.8% since 21, when cash costs averaged $3.24. Meanwhile, the average price of silver has increased 19.% per annum in the same period, more than offsetting increased costs. While costs are expected to continue to increase at a rapid rate, albeit possibly slower than seen in the past decade, silver prices have declined in the past two years. This will squeeze operating profits and could discourage the development of some primary silver mine projects. That is reflected in the 2 million ounces of capacity that has disappeared from development plans mentioned earlier. Silver secondary supply declined sharply in 213 to 23 million ounces, down 19% from 212. This was the lowest level of scrap recovery since 1999, when million ounces of silver were recovered from scrap. Scrap recovery declined in large part due to the weakness in silver prices. The majority of secondary supply comes from old scrap, mostly in the form of jewelry and silverware. Consumers in possession of this potential source of supply often hold on to the metal during periods of declining and low silver prices as well as periods of heightened price volatility. When prices are rising, scrap sales typically rise as these consumers seek to capture higher values. Silver Mining Cash Costs Annual Average Primary Producers' Silver Cash Costs and Prices $/Ounce $4 $/Ounce $4 There is also a portion of silver scrap supply that is less sensitive to the price of silver. This metal is typically recovered from the various industrial uses of silver, such as electronics, chemical catalysts, photographic materials, and other manufactured products. There are large refining services that have been set up and operational for decades to recover silver from these products, and they have developed processes that allowed them to recover this metal even when the price of silver was in the low single digits. Additionally, governments around the world are becoming increasingly particular about the proper recovery of metals, especially from scrapped electronics. Increased government regulation of the process in which these products are discarded and this material is recovered is expected to increase the amount of electronic items scrapped and also increase the amount of metal recovered from each electronic item. Silver prices are expected to remain weak in 214. Given that a majority of silver scrap supply comes from jewelry, the weakness in prices is expected to weigh on silver secondary supply. Total secondary supply in 214 is forecast to slip to 2 million ounces. The increased rate of growth in global silver mine supply during 214 coupled with a slowdown in the rate of decline of secondary supply during 214 is expected to result in total silver supply slipping marginally to 93 million ounces in 214, down.1% from 213. Inventories Silver bullion inventories, which include both reported and unreported inventories, declined in 213 to million ounces, down from million ounces in 212. The 39.6 million ounce decline in inventories was entirely the result of a decline in unreported inventories. Reported inventories rose meanwhile to 86.2 million ounces, up 6.7 million ounces from million ounces in 212. Margin Between the Price of Silver and Average Cash Operating Costs $/Ounce 3 $/Ounce 3 $3 $3 $3 $ $3 $ 2 2 $2 $ Annual Average Silver Price $2 $ 1 1 $1 $1 $ $ Average Cash Cost $ $

9 214 Silver Market Outlook Page 7 Reported silver bullion market inventories include stocks held in exchange-registered depositories, exchange traded products (ETPs), and dealers. The increase in these stocks was driven entirely by an increase in exchange stocks, which rose to million ounces at the end of 213, up from million ounces at the end of 212. This increase in exchange stocks was driven by an increase in Comex stocks to million ounces at the end of 213, up from million ounces at the end of 212. Meanwhile, SHFE stocks were down to 14.4 million ounces at the end of 213 from 31.2 million ounces at the end of 212. Since around the amount of silver accumulated in exchange traded funds has taken up an increasing share of reported market inventories, rising from roughly % in 2 to 7% of total reported silver stocks in 213. This represents investors who have shifted from unreported bullion holdings to reported ETP holdings. Unreported silver bullion inventories are estimated based on silver s historical market balance. Private investors have historically been the largest holders of silver. Additional inventories are held by market-making banks and dealers. Investors appear to have moved away from holding bullion on their own for several reasons. One obvious reason has been the rise in silver prices, which saw longtime silver holders taking profits. Others have shifted to other forms of storing silver. Others have shifted to owning silver coins. Investors own a whopping 1,267 million ounces of silver in coins, meanwhile, far more than in bullion bars, having added around 137 million ounces of coins to their holdings in 213 alone. Conclusion Over the course of 214 silver prices are unlikely to decline below the $18.2 low reached in June 213. Prices may not run away on the upside this year, but they seem more likely to rise from early 214 levels than to fall. Silver prices easily could be 2% higher toward the end of this year than the $2.2 silver price as this was being written on 1 January. The negative sentiment toward silver among some market participants in 213 may restrain silver prices for part of this year, but is expected to give way to bargain-hunting buying and fresh investor demand once it appears that prices have stopped falling. Many of the shorter term investors and trend followers already have liquidated their silver positions, while investors with a longer term view have been using the weakness in silver prices as a buying opportunity and providing support to prices. Strength in demand for silver coins, a further sharp decline in silver secondary supply, lackluster growth in silver mine supply, and healthy fabrication demand are all factors that are supportive of silver prices. Longer term global macro economic problems that resulted in the Great Recession are still unresolved and in some cases have deteriorated further. These problems will catch up with the global economy in the medium term, at which time many of the shorter term investors who have abandoned silver are expected to come back to silver and drive sharply higher the price of silver. Given the limited downside potential of silver prices from present levels, 214 may be a good time to make fresh purchases or add to existing silver holdings. Silver Market Inventories Silver Bullion Inventories 3, 3, 2, 2, 1, 1, Implied Unreported Stocks Government Dealer Exchange ETPs Reported Market Inventories and Prices Price/Ounce Price (Right Scale) Reported Inventories 21 (Left Scale)

10 214 Silver Market Outlook Page 8 Silver Statistical Position Supply p Mine Production Mexico United States Peru Canada Australia China Other Total % Change Year Ago.3% 1.4%.8% 2.% -.4% 2.3%.7% 2.% Secondary Supply Old Scrap Coin Melt Other Supply Indian Scrap Total % Change Year Ago 2.9% -.1%.2% 3.1% -1.2%.8% -19.% -6.% Other Supply Government Disposals Net Exports from Transitional Economies Total % Change Year Ago -4.8% -76.9% -66.7% 48.% -23.% -77.% -1.% N/M Total Supply % Change Year Ago 1.8%.9% 4.1% 2.3% -.7% 1.9% -.% -.1% Fabrication Demand Photography Jewelry & Silverware Electronics and Batteries Solar Panels Other Uses Other Countries Total Fabrication Demand % Change Year Ago 1.% -1.8% -.% 2.3%.8% -1.7% 2.9% 2.9% Net Surplus or Deficit Addenda Coinage Price Per Ounce High $. $2.79 $19.33 $3.94 $48.8 $37.14 $32.44 Low Average % Change Year Ago.9% 11.3% -2.% 38.4% 73.8% -11.7% -21.9% *; Notes: Totals may not equal the sum of categories due to rounding. Mine production in Poland, Bulgaria, Romania, Hungary, the Czech Republic, and Slovakia is included in "other" mine production; Photography, jewelry and silverware, electronics, solar panels, and 'other' industrial use reflects demand in Europe, the United States, and Japan.; These sectors include Canada from 1979, Mexico from 1982, Hong Kong from 198, Thailand from 1986, India from 1987, Australia, Brazil, Peru, Colombia, Argentina, Chile, Korea, Pakistan, and Bangladesh from 1989, China from 2, and Taiwan from 199; Demand excludes the transitional economies, except for imports.; The price is the Comex nearby active settlement, percent change from year earlier period. 213 through 7 January. There may be discrepancies due to rounding; p - projections; NM - Not meaningful; Source: CPM Group 7 January 213.

11 CPM Group LLC CPM Group is a fundamentally based commodities research shop. We develop our own proprietary estimates of gold, silver, platinum, and palladium supply and demand on a global basis, drawing on every resource we can find, including our own extensive list of contacts involved in precious metals around the world. We have been doing this sort of research and analysis since the 197s, far longer than anyone else in the business. We also undertake research in specialty metals, base metals, energy and agricultural commodities. We are known for our basic fundamental research, a wide range of financially oriented consulting services, and our expertise in using financial derivatives to structure financing for producers, refiners, industrial users, and investors interested in either hedging or investing in commodities. Our investment philosophy is simple: We are value investors who base our decisions on what to buy, sell, hold, or avoid on the fundamentals of each asset, and the macro-economic, financial and political environmental factors that we expect will affect that asset s value. We have concerns, expressed in this report and elsewhere, about long-term imbalances in government deficit spending, public and private debt, and a wide range of other economic and political factors. We don t expect the world s financial system to collapse, however. That is not the way the world tends to work. More likely economic outcomes in the real world lie between the extremes of cataclysmic collapses and nirvana. We advise our clients and practice what we preach to have some of their wealth in gold and silver as an insurance policy against a catastrophic failure, but we also advise them to invest other portions of their money in precious metals and other assets based on the assumption that that sort of failure does not occur. We focus on investing based on likely scenarios, but with an eye always open to outlying events that take the world s markets by surprise. We have watched investors who were so worried about a collapse that they missed some of the largest stock and bond market rallies of all times over the past 3 years, while watching their safe haven assets fluctuate eight-fold in value up and down, and then up and down again. We prefer our clients to buy and sell precious metals and other assets based on cyclical and other developments, while also maintaining that long-term insurance policy in case the levee breaks. CPM Group LLC 3 Broad St. 37th Floor New York, NY 14 USA

12 For more information on silver, and how specific gold, silver, palladium and platinum investments may be used to protect yourself or profit from the events we foresee, please contact: MONEX DEPOSIT COMPANY 491 BIRCH STREET NEWPORT BEACH, CA 9266 (8) (949) 72-14