Silver Price "Capped by China Stockpiles"

CHINA has built a huge stockpile of silver, says analysis published this week, and the Silver Price is unlikely to breach $35 per ounce until industrial demand cuts those reserves, forcing bullion imports to grow again.

"As long as China does not import silver, the price is unlikely to rally on a sustainable basis," believes Walter de Wet, strategist in London for South African bullion and investment bank Standard Bank.

On Standard Bank's analysis, Chinese warehouses currently hold enough silver to meet the country's industrial demand for 15 months. That surplus has risen sharply from 12 months' worth in 2011.

Stockpiles were as low as 4 months demand as recently as 2009, says de Wet, "and we believe that China’s inventory needs to decline to at least 10-12 months of fabrication demand in order for demand-pull pressure to build.

"Until then, we expect Silver Price rallies to fade above $35 per ounce."

Globally, silver fabrication demand rose some 4% in 2011, according to leading data providers Thomson Reuters GFMS. Standard Bank now sees fabrication demand rising 3% worldwide in 2012, with 7% growth in China.

But China's new demand for silver "is not very strong at the moment," says de Wet, pointing to the sharp decline in Shanghai premiums – over and above the London price, which acts as the world benchmark – down from as much as $5 per ounce last summer to below 50 cents in February.

This indicates "that China is drawing down silver stockpiles," Standard's strategist adds, also noting the recent decline in net imports of Silver Bullion.

Base metals such as copper are also seeing weak import demand from China, says the latest Commodities Weekly from French bullion and investment bank Natixis.

"The New Year holiday may be over, but...in some locations workers have been slow to return to factories," says the report. "This certainly matches the picture of weak prices, wide contangoes [with immediate delivery cheaper than future settlement] and growing domestic stockpiles, which may yet persist for some weeks to come."

Eventually, "China will have to come back and restock" its silver supplies, concludes Standard Bank. This re-stocking "could provide enough support" for the Silver Price to trade above $35 per ounce – and test $40 – in the third quarter of 2012, believes de Wet.

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