Silver will decline to $13 levels: Nic Brown

Q&A with head of commodities research, Natixis

Silver prices have fallen faster than gold prices in the last one year. Nic Brown, head of commodities research, Natixis, in an email interview discusses the outlook for silver prices with Rajesh Bhayani. Edited excerpts:

Do you see silver prices falling further?

Similar to gold, we expect silver prices to decline further over the coming year. Our forecasts for silver prices anticipate a steady decline to a low of around $13/oz by the end of 2016.

How much can it go down? 

In a worst case scenario, which, frankly, describes most of the metal markets at the minute, prices may have to fall to the point at which supply becomes constrained. Mining companies have already curbed investment in new output, but this will not have any significant impact on volumes of mined output until 2017, if not beyond. For output to fall before then, mines must to be forced to close, so prices could fall further, since costs of production for gold are somewhere in the region of $700/oz.  

Assessing the cost of production for silver is more difficult, since a large proportion of global output is produced as a by-product. For those few mines that are predominantly silver producers, costs of production are somewhere in the region of $8/oz.

Gold to silver ratio is at a significant high of around 75. Can silver still fall?

Yes, the ratio is high but this strength in gold prices relative to silver prices is not unexpected. Silver prices typically exhibit strong positive co-relation versus gold prices. At the same time, silver prices typically move by more than gold prices (with a beta of around 1.4). Hence, during a secular bear market, one would expect the gold:silver price ratio to rise steadily.

Will silver at some point decouple from gold? If so, when? 

Western investors that held gold in physically-backed ETPs have relinquished a substantial portion of their holdings over the past two and a half years. In contrast, holdings of silver in physically-backed ETPs remain close to their recent highs. There is therefore a risk that investor outflows could have a disproportionate impact upon silver prices were markets to fall further.

What is silver demand and price outlook from a three and 12-month perspective? 

Industrial demand for silver is expected to remain solid over the coming year, but in the absence of investment demand that is unlikely to be enough to prevent prices from falling further.