Silver to hit US$15: GFMS

Facts ‘N’ Figures

Investment demand has driven the silver price higher and could take the white metal back to the US$15 level in the next few months, according to a recent report on the silver market by London-based precious metals consultants, GFMS.

Investment demand has risen in 2006 for the third consecutive year and may well exceed a net 80 million oz. (2,500 tonnes) this year.

The early part of 2006 was dominated by speculative buying, mainly by hedge funds ahead of the launch of the silver exchange-traded fund (ETF).

A period of massive two-way business occurred in the wake of the launch in late April, consisting of both heavy purchases of the fund and large-scale profit taking in the OTC market and on Comex from those that front-ran the launch.

Silver has benefited from the general growth in investor interest in commodities. For example, silver now makes up 2% of the Dow Jones-AIG Index.

Private investor demand is also growing outside the more visible commodity basket products and the ETF, although volume is still modest and, especially in the U.S., bullion investors have been active on both sides of the market.

Near-market bullion inventories increased in 2006, with private sector holdings rising by more than the fall in government stocks. Loco-London bullion stocks have increased considerably due mainly to investor demand for the ETF, whose related stocks as of Oct. 31, 2006, had reached nearly 104.78 million oz. (almost 3,259 tonnes).

For the first 10 months of this year the average silver price (based on the London fix) was US$11.24, up 58% year-on-year.

Other points from the GFMS silver market report are as follows:

* Mine production is forecast to increase by some 4 million oz. (125 tonnes) or 0.6% this year. Globally in 2006 by source, GFMS predicts growth in lead-zinc, copper, and gold byproduct (all up by roughly 2%), with primary production, in contrast, expected to fall by some 3%. The outlook for 2007 is for an increase of around 16 million oz. (500 tonnes) in total silver output, with strong growth predicted to continue into 2008.

* Scrap supply is expected to be broadly unchanged this year, in spite of the massive year-on-year rise in silver prices. GFMS points out that scrap supply for silver is far less price-sensitive than for gold (where scrap has surged this year) due to the very different composition of the above-ground stock of fabricated products and much higher margins over the metal value on silver than gold jewelry. Furthermore, a large share of silver scrap supply is from recycled photographic products, an area in decline.

* Government sales appear to be on track for a marginal increase. There is strong evidence that Chinese and Russian sales have held up in 2006, probably due to the attractive price level. In addition, India looks likely to sell up to 30 million oz. (930 tonnes) into its domestic market.

Moving away from the supply side, fabrication demand is expected to fall by just over 3% or nearly 28 million oz. (860 tonnes) from 2005’s revised level.

Industrial demand was strong over the first half, but has slowed in recent months. GFMS is forecasting a full-year gain of nearly 1% to a new record level. However, demand is expected to fall in 2007 under the impact of a weaker year for the electronics industry.

Jewelry and silverware fabrication in many countries has been little affected by the silver price rise. However, in the case of the key Indian market, a continued secular shift in favour of investment in bullion instead of high-carat jewelry — plus the impact of record local prices — has had a dramatic impact on demand. Lower Indian fabrication explains much of the near 8% year-on-year global fall forecast for this category.

Photographic use of silver is expected to drop by close to 11% in 2006. Demand continues to be affected by the switch to digital technology.