Silver coin, ETF sales continue surging as China increase grip on market

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Its no secret that the gold price has outpaced silver so far in 2016, but investors are still piling into the latter metal via both coins and ETFs, helping fuel an 11% run higher this year.

The U.S. Mint has sold 12.7 million ounces of silver American Eagle coins, as of March 14. That pace is more than 27% higher than the same period during last years record sales run, when 47 million ounces were purchased.

Meanwhile, Bloomberg reported that holdings in silver ETFs have reached their highest level in seven months, and hedge funds and other money managers hold a near-record bet on further price gains via the futures market.

5% supply drop predicted: Economic uncertainty isnt the only driver of silver prices this year. According to the Silver Institutes February newsletter, a supply-demand squeeze is taking shape. Silver industrial demand, the largest component of total silver offtake, is set to increase its share of total demand in 2016, it said, citing in particular growing use of solar power, which uses the metal. In addition, global mine supply production is projected to fall in 2016 by as much as 5% year-on-year. This would represent the first reduction to global silver mine production since 2002. The firm also is predicting further weakening in scrap supply.

And the institute is not alone in this forecast. Standard Chartered Plc has concurred, saying mine production of silver will probably drop in 2016 for the first time in over a decade and demand is set to outstrip supply for a fourth straight year, according to a Bloomberg report.

Firm sees $21 price in 2017: With the gold-silver ratio still above 80-to-1, the imbalance suggests that silver is very undervalued relative to gold. Capital Economics is even forecasting the white metal will hit $21 in 2017, potentially taking the ratio back near 65-to-1.

And while Chinas appetite for gold usually gets all the attention, it has quietly staked out a powerful position in the global silver market.

Chinese bank takes London role: Reporting at USA Today, Dave Forest of noted that the futures-exchange operator CME Group, which manages the price-setting mechanisms in London, announced that the China Construction Bank will officially become a member in that process. CCB will join HSBC, JPMorgan Chase, the Bank of Nova Scotia, Toronto Dominion Bank, and UBS.

The first time that China will have direct influence on this process, Forest said. And the entry of China Construction Bank into the market could also have some other important consequences for precious metals.

How so? By helping China offer yuan-denominated silver contracts both domestically and in London. That plays into Chinas strategy of internationalizing its currency at the expense of the U.S. dollar.

Gold is always a sound investment, but the stars also are aligning for silver to take off in its wake.