Price of Silver in 2016: Could It Bounce Higher?

Image: Creative Commons/Armin Kubelbeck.

Silver lost ground in 2015, continuing a three-year losing streak that cut another 12% off the price of the metal to around $14.45 per ounce. The question going forward is whether silver can finally manage to bounce back in 2016, or whether the ongoing slide in commodities will keep its grip on the silver market. Below, we'll look at some of the factors affecting silver prices for 2016 and beyond.

Silver in 2016: Due for a bounce?
The bullish argument for silver going forward hinges on the metal's unusual combination of characteristics. On one hand, silver trades somewhat in line with gold and the rest of the precious metals complex, despite its obviously cheaper price compared to its peers. On the other hand, silver has a wide range of uses in industrial processes, and that makes it behave more like a base metal during certain markets.

Neither characteristic has really helped silver in the recent past. The plunge in base metals like copper and iron ore has come from weak manufacturing demand in key industries like infrastructure and construction, and those trends have likely weighed on silver as well. At the same time, gold has gone nowhere but down for several years, and the platinum-group metals have suffered more dramatic drops over the past year as the weakness in commodities spread.

2016 price projections on silver (per ounce)

Source: Analyst projections via Kitco.

Yet at least one source of demand continues to support silver: retail coin investors. Major mints have had trouble keeping supplies of popular silver coins high enough to meet demand. Still, the size of the silver market is large enough that even the significant influence that retail investors have won't be enough to send prices up by themselves.

Looking at miners
As we've seen with gold, the silver mining industry has struggled even more than the metal itself. Yet the industry's troubles could eventually be a contributor to higher silver prices.

Throughout 2015, hard-hit silver miners looked to financing markets to keep them afloat. After exhausting traditional remedies, streaming companies like Silver Wheaton (WPM -0.08%) and Franco-Nevada (FNV -0.31%) remained as lenders of last result by buying up rights to future production.

Coming into 2016, streaming companies are facing capital constraints of their own. Silver Wheaton, for instance, made several big deals last year and has also looked to buy back shares of its own depressed stock. As a result, silver miners that might have gotten financing in past years could find it difficult to get the capital they need in 2016. That could result in shutdowns or temporary work stoppages.

In the commodities markets, the key to rising prices is for supply and demand to find a new equilibrium. If mining companies stop producing, either because of financial difficulties or because of strategic decisions to wait until prices improve, then the resulting drain on overall supply should be supportive of prices.

A silver lining?
Unfortunately, the other half of the equation is far less clear, because demand has been haphazard at best in recent years. Enough investors have gotten burned trying to call a bottom in the silver market that there are few value-seeking opportunists left to try their hand at timing the market. With the Federal Reserve's anticipated interest rate hikes and weak economies across the globe all weighing on the precious metals markets, silver prices in 2016 will only post gains if conditions unexpectedly improve to a substantial extent -- both throughout the mining industry and in the overall economic picture around the world.