No silver lining for bullion in dollar rise

The price of silver dropped back below $16 an ounce at the start of the week.

A long-term chart of the grey metal looks like the downtrend from the 2011 peak of near $50 is intact.

The price is back below the 50-day moving average of about $16.40 at mid-session on Tuesday.

Declining prices resulted from cyclical and structural drops in industrial demand, the latter relating to falling silver use in photography.

Furthermore, according to Bank of America Merrill Lynch, "against the backdrop of substantial global competition and overcapacities, solar panel producers . . . have reduced silver usage per panel by around 75 per cent over the past 10 years".

From an investor perspective, it seems the impending "normalisation" of US monetary policy is a crucial factor damping silver demand of late.

Like gold, silver is sensitive to dollar moves (because of its industrial uses, it is less wary of higher interest rates, which increase the opportunity cost of holding the non-yielding yellow metal).

The firmer buck has helped stall inflows into silver exchange traded funds, though it is interesting that coin sales have been strong says BoAML, "partially because retail investors have been diversifying portfolios".

We noted in the previous column that some investors were perceiving the first stirrings of reflation in the US.

If such concerns were to build during a sustained period of US dollar underperformance (counterintuitive yes, but the buck is already at a 12-year high) then the bullion downtrend could well be challenged.

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