New silver investors cause price hike: CPM Group

METALS COMMENTARY

Silver prices have risen sharply, both in 2005 and through the first four months of 2006 and the forces behind these increases mostly reflect a fundamental shift in the silver market. According to Silver Yearbook 2006, an annual publication of the New York City-based CPM Group, old-line investors who have been net sellers of silver bullion over the previous 16 years are limiting their sales, while newer investors are buying more silver. The result? The flow of silver from investor stocks that has characterized the past 16 years drew to a close in 2005, and is being replaced by a new cycle of silver buying.

CPM Group says that during the next several years the silver market could look more like it did in the 1980s when high prices were the rule.

A year ago, in its 2005 report, CPM Group outlined some of the broad changes that were under way in the silver market, including the influx of new investors. Many of these investors are familiar with the equity and fixed-income markets, and are seeking greater transparency in the silver market. These trends gained momentum over the course of 2005 and early 2006, and are underpinning the sharp increase in silver prices over the previous 15 months.

Silver prices (based on the Comex nearby active futures contract) rose 9.7% to an average of US$7.35 in 2005 from US$6.70 in 2004. In the first quarter of 2006, silver prices averaged US$9.78, up almost 40% over the same period last year.

The physical silver market operated in a deficit for the sixteenth consecutive year in 2005, with newly refined supplies falling short of industrial demand by 15.7 million oz. This reflects a narrowing of the deficit from its peak of 194.9 million oz. in 1997. From 1990 through 2005, the cumulative net deficit was around 1.96 billion oz.

A net surplus of 48.4 million oz. is projected for 2006. Total supply rose 790.7 million oz. in 2005, an increase of about 5%. In 2006, supplies could rise 3% to 814.1 million oz. Mine production continued to rise in 2005, increasing 1.7% to 529.6 million oz. In 2006, mine output should increase another 2.9% to 545 million oz.

Secondary silver supply increased 4.4% to 226.1 million oz. last year. In 2006, secondary supply could expand 4.9% to 237.1 million oz.

Government disposals of silver more than tripled to 35 million oz. in 2005, as the Reserve Bank of India offloaded a large chunk of reserves. The bank had 67.5 million oz. of silver in its reserves going into 2005, and it may completely sell off those inventories by year-end.

Industrial demand for silver rose 0.7% last year, to 806.4 million oz. The increase was centred on a sharp increase in silver use in electroplated jewelry and decorative objects in India, where solid silver items had become too expensive, prompting a massive shift to less expensive electroplated products.

Demand is expected to decline 5% to 765.7 million oz. in 2006.

The photographic sector experienced a 4.2% decline to 208.2 million oz. last year, and a 12.3% decrease to 182.5 million oz. is expected for 2006. The sector has been hampered by the growing use of digital cameras, which do not require film — at one time, a large market for silver.

Demand for jewelry and silverware, however, more than offset the decline in photography in 2005, with demand in that sector rising 19% to 288.8 million oz. This year, jewelry and silverware demand is expected to consume 271.6 million oz., down 6%. The net flow of metal into and out of the transitional economies shifted in an important way in 2005. In 2005, net imports are estimated to have totalled 10 million oz. This represents a shift from net exports of 5 million oz. in 2004. In 2006, net imports from the transitional economies are projected to remain at 10 million oz.

Last year, silver used in coins accounted for roughly 16.5 million oz. silver. This year, coinage demand could consume slightly more, totalling 16.8 million oz. silver.

The Silver Yearbook is supported by Apex Silver Mines, Apogee Minerals, Avino Silver & Gold Mines, Bear Creek Mining, Commodities Now, Endeavour Silver, Excellon Resources, First Majestic Resources, Great Panther Resources, Hecla Mining, IMA Exploration, Kimber Resources, Macmin Silver, Minera Andes, Mines Management, Noah Financial Innovation, Orko Silver, Sabina Silver, Scorpio Mining, Silver Dragon Resources, Silver Standard Resources, Silver Users Association, Silver Wheaton, Silvercorp Metals, the Institute of Scrap Recycling Industries, the Prospector Exploration and Investment Newspaper, and UC Resources.