Economic woes hamper silver market

The silver market appeared calm in 2002, compared with the more volatile gold, platinum, and palladium markets, according to London-based CPM Group.

In a report titled Silver Survey 2003, CPM points out that silver fabrication demand declined 3.2% in 2002, reflecting lower use in jewelry, silverware, photography and other applications. It was the second consecutive year in which fabrication demand declined. Moreover, silver reached its lowest level of use since 1996. Contributing to the decline were a weak international economy and the fact that fewer people took vacations, which meant fewer pictures were taken and developed.

Total silver supply from mine production, scrap recovery and other sources also declined in 2002. Supply declined from all sources, including a 1.1% drop in mine production and a 2.8% decrease in secondary recovery from scrap.

Sales from government stockpiles declined last year, as the flow of silver from the U.S. National Defense stockpile ceased after those inventories were depleted. The U.S. government held 179 million oz. silver in 1980. Some of this was sold in auctions in the early 1980s, but most of it was used slowly from 1986 through 2002 in the production of U.S. Silver Eagle bullion coins by the U.S. Mint. By last year, the last of the National Defense silver stockpile had been used. The coin program, which used nearly 10.5 million oz. silver last year, continues, with the U.S. Mint now buying silver on the open market.

Silver producers have been restructuring their operations to lower costs and increase production, which should lead to production gains in 2003 and beyond.

Other silver production, in the form of byproduct, comes from copper, gold, lead and zinc mines. Several copper mines were shut down, at least temporarily, in 2002, and these closures contributed to the overall decline.

Silver prices remained relatively stable in 2002, though they showed some indications of rising. Prices began 2002 at US$4.53 per oz., having touched US$4.02 in November 2001. Prices rose to US$5.16 per oz. by July 2002 but then slumped back to a low of US$4.30 in October. They rose once again in the final two months of last year, ending 2002 at US$4.81 per oz. In January 2002, prices rose further, touching US$4.95 per oz., but then retreated to a range of US$4.40-$4.60. The silver price averaged US$4.60 in 2002, which was 5.2% higher than the US$4.38 average in 2001.

Meanwhile, the silver market continued to suffer from declining liquidity and trading volumes last year. This reflected a move away from silver and other commodities by major banks, brokerage companies, and other financial institutions. Banks and brokerage houses once traded a large amount of silver and gold, primarily through the global interbank market centred in London. Over the past few years, many banks and brokerage companies have pulled back from the proprietary trading. As a result, the amount of silver trades cleared by London banks has fallen sharply. By 2002, the total amount of silver trades cleared was down to 21.9 billion oz., off 17.5% from 26.6 billion oz. in 2001 and down 70.6% from 74.6 billion oz. in 1997. The physical silver market is estimated to be 723.5 million oz.

The volume of silver traded on the New York City-based Comex futures and options exchange, along with smaller volumes in Tokyo and Chicago, rose 21.4% to nearly 19.3 billion oz. in 2002. This increase reflected rising interest in silver by commodity-trading advisors, commodities funds, and individual investors who often trade silver through the futures and options markets. Other investors showed signs of increasing interest in physical silver. This reflected poor investment conditions in stocks, bonds and other investments. Investors remained net sellers of physical silver on a global basis last year, selling an estimated net 61.3 million oz. of silver. This was down slightly from 65.8 million oz. in 2001, but less than half the 131 million oz. sold on a net basis in each of the two years 1999-2000. This lower net volume reflects both a decrease in silver sold on a gross basis by long-term holders of silver and rising purchases by investors who are adding to their stocks.

The report also discusses estimates of world silver inventories, which have been declining since 1990. It covers changes under way in the Indian silver market, one of the largest in the world, and reviews changes that are occurring in Chinese mine production, refined product, domestic consumption, and exports.

Silver Survey 2003 was sponsored by Apex Silver Mines, the Institute of Scrap Recycling Industries, Placer Dome, Silver Standard Resources, and the Silver Users Association.