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Silver shortage promises to boost price in 2019

[NEW YORK] Think of it as a potential silver lining for investors. A burgeoning shortage of the precious white metal is promising to boost its price as 2019 rolls out.

Silver surged 9.1 per cent in December, its biggest monthly gain in almost two years. This year, with miners avoiding new projects amid global economic uncertainty, the price could spike as high as US$17.50 an ounce from about US$15.36 now, according to a Bloomberg survey of 11 traders and analysts.

About 26,000 tons of silver is expected to be produced this year, according to estimates by Robin Bhar, a London-based analyst at Societe Generale SA. That would be the least since 2013, and means global physical demand will top supply for seventh straight year. It comes as industrial use, ranging from solar cells to computer touch screens and even medicine, is booming.

"Supply growth has started to slow, more than for any other precious metal," said John LaForge, the head of real assets strategy at Wells Fargo Investment Institute.

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Demand for silver comes from three very distinct uses. Consumers buy silver jewelry and tableware. Investors see silver, like gold, as a hedge buy in volatile times.

Industry, meanwhile, is the most significant user, gathering up about 55 per cent of available silver yearly, compared with about 10 per cent for gold. The metal's high conductivity to electricity and heat, along with its sensitivity to light and anti-bacterial qualities, contributes to literally hundreds of products, skewing the supply-demand formula for precious metals.

The industrial-applications sector will likely boost demand for the metal in 2019, according to Bloomberg Intelligence's analysts Eily Ong and Tobias Nystedt. They see silver with a 50 per cent upside for demand by 2023, compared with 17 per cent for copper and 11 per cent for gold.

Other analysts see more of a balancing act ahead, with the relative strength of the global and U.S. economies playing a significant role.

"While we continue to see uncertainty over global growth persisting, boosting investment demand for precious metals, we remain unconvinced that this relative preference for silver will continue," analysts at Goldman Sachs Group Inc., including Hui Shan, wrote in a report earlier this month. "With many more industrial uses, silver demand is also more susceptible to slowing global growth."

The Federal Reserve is also an issue. Silver and gold have been among the best performing assets in the past three months as investors scale back expectations for interest rate hikes in the U.S. amid signs of slowing global growth.

However, the central bank has recently indicated it will monitor data moving forward to decide future monetary policy. If the Fed slows rate increases, it will boost the value of silver and gold; if not, it could drop.

Before late 2018, "there was no love for the metal. Going forward these concerns will be played out throughout the year," said Maria Smirnova, a Toronto-based portfolio manager at Sprott Asset Management, which oversees US$7.6 billion. "There's been a sea change in investor sentiment that obviously drives precious metals, and silver takes its cues from there."

BLOOMBERG