GFMS’ silver market review

On Nov. 17 at the annual New York silver dinner organized by the Silver Institute, the London-based GFMS presented its interim silver market review. Below are key points from the review:

Supply

Total supply is forecast to end its three-year run of stability and rise by 5% in 2010. Much of the gains will come from higher mine production and scrap, plus a higher but still modest absolute level of government sales.

Mine production should again register moderate growth, rising some 24 million oz. (740 tonnes) or over 3% in 2010. Gains centre on Mexico (mainly the ramp up at Goldcorp’s Peasquito and Coeur d’Alene Mines’ Palmarejo), Argentina (chiefly the ramp up of Silver Standard Resources’ Pirquitas), Chile and Australia (thanks to gains at BHP Billiton’s Cannington). A key loss is a 5% decline in Peru. Globally, primary silver output is expected to grow around 3% with stronger gains for gold and lead/zinc, while copper mines look set to deliver slightly less silver.

Scrap supply is forecast to expand by over 10% this year thanks to growing receipts from industrial and jewelry sources and despite the ongoing structural slide in recovery from photographic waste, the main source of silver.

Government sales are projected to rise strongly this year, chiefly due to higher sales by Commonwealth of Independent States countries, although the world total reached would remain low in comparison to the average rate of sales over the past decade.

Demand

Fabrication demand is forecast to grow by almost 10%, although the projected total remains some 4% down on 2008 levels. Ongoing but more modest growth in 2011, however, should lift global demand back to earlier record levels.

Industrial demand looks set to rebound by a healthy 18% this year, thanks to a recovery in underlying demand and the refilling of a heavily denuded supply pipeline. This, however, only represents a partial recovery with the 2010 figure still a little down on 2008 levels. Limited further gains from stock replenishment plus a possible slowdown in global gross domestic product growth should mean less dramatic increases for industrial offtake next year, perhaps ruling out a return to pre-crisis levels despite the surging contribution from the photovoltaic and ethylene oxide catalyst sectors.

Jewelry fabrication is expected to rise by around 3% this year, partly as a result of substitution from increasingly expensive gold. Further such modest gains are forecast in 2011, taking offtake to a five-year high.

Silverware demand is projected to fall by 13% this year, due mainly to price-focused losses in India.

Photographic use of silver is forecast to continue its structural decline due to digital inroads, shedding some 11% this year, with further if less-hefty losses for next year.

Coin minting should rise 23% this year, taking the total to an all-time high basis GFMS’ data series.

Producer hedging is expected to stay on the demand side this year but only at very modest levels.

Investment

Investment demand (including all coins and medals) remains elevated, being projected to grow in 2010 to an all-time high (basis GFMS’ records) of more than 210 million oz. (6,500 tonnes). Further gains to a new record are also projected for 2011.

Investment earlier in 2010 owed much to confidence over world economic growth and thus industrial metals’ demand. It also benefited from safe-haven buying in May and June, due largely to the European sovereign debt crisis.

After a “summer lull,” there has been much stronger growth in investor interest. Key to this have been concerns over the solidity of the U.S. dollar and potential future inflation stemming largely from the Federal Reserve’s second round of quantitative easing. Further support has come from a positive price trend, the fact that the all-time nominal high for silver (almost US$50 per oz. in 1980) remains a good way off and as silver’s historically greater volatility but close correlation to gold continues to attract those seeking a more leveraged alternative to the yellow metal.

Prices

Silver prices in the first 10 months of the year, basis the London Fix, averaged US$18.61 per oz., a rise of 32% year-on-year but that excludes early November’s spike to a year-to- date high of US$28.55, representing an intra-year gain of 66%.

The main driver of the price remains investment demand and, in GFMS’ view, this has elevated silver to well over fundamental equilibrium levels in the absence of such investment.

Silver’s fundamental demand (i. e. excluding investment) should continue to rise next year, chiefly due to gains in industrial uses. However, this will be outweighed by gains in total supply as mine output rises (both scrap and government sales are projected to fall). While this might appear bearish, we remain confident that investors will be of a mood to absorb the resultant, growing surplus, as key supports such as ultra-low interest rates, a weakening dollar and a buoyant gold market should remain with us, all of which should be easily enough to rally silver prices yet higher.

In spite of what appears currently to be a substantial end-year correction in the price, GFMS still expects silver to trade above US$30 in 2011. However, we are doubtful such elevated levels will be sustained throughout the year and, as a result, we see an annual average either side of US$28 as more likely. We could also add that a retreat from over US$30 would not necessarily imply an end to the multi-year rally in 2011.