Emerging from gold’s shadow

Metals analyst Jeffrey Christian of the CPM Group in New York started his silver forecast at the recent Prospectors and Developers Association of Canada (PDAC) convention in Toronto with a bit of flag waving.

Christian noted that silver enjoys all the same benefits of its more attention-grabbing yellow counterpart as a hard asset alternative to paper money, but also has the added advantage of being an “industrial metal in tight supply.”

The situation has helped to propel silver to the US$20-per-oz. mark — and while the higher price tag means a decline in jewelry demand, he contends that investment demand and industrial demand for the metal are outpacing such losses.

Despite that strong demand, stockpiles of silver remain in surplus, a situation that, counter-intuitively, bodes well for the metal, according to Christian.

A deficit in silver materializes when fabrication demand is greater than total mine supply, triggering investors to become net sellers. This is the normal scenario on the silver market.

A surplus in silver, however, results in investors becoming buyers and driving prices up. Historically, there have only been three periods when silver was in surplus, including the present period. The resultant buying by investors, Christian said, is the single biggest factor driving silver prices.

On the supply side, Christian said mine production is set to increase by 100 million oz. silver per year over the next 10 years as large projects like Apex Silver’s San Cristobal, and Coeur d’Alene Mines’ San Bartolome ramp up to full production. Both of those projects are in Bolivia, a country whose silver production is slated to provide 40 million of the 100 million anticipated new ounces.

Tracing the industrial demand for all of those ounces has become slightly more complex with the decline in one of its primary uses: camera film.

As photo use decreases with the growth of digital photography, one might expect industrial demand to take a heavy hit. Not so, Christian said. In India alone, industrial demand is up 15% as the metal is going into more electronics and batteries.

Overall fabrication demand was down 1.5% last year, but is anticipated to rise 2% this year.

Demand is also coming from the Middle East, where people value silver medallions as an investment. To meet that demand, India is buying silver at a discount and shipping medallions there.

With such positive drivers behind the metals price, over-exuberant silver investors that look backwards to see the future may be feeling justified.

Some investors point to the US$48-per-oz. silver price attained in 1980 as a harbinger for the rest of the year, but Christian deflated those expectations with some sobering words.

“Because a price reached a certain level in the past does not mean it has to reach that price again,” he said.

He pointed out that the cherished US$48- per-oz. mark actually only lasted for one day. A month later it was down to US$33 per oz. and later in the year, silver managed a remarkable 50% decline in a single day–from US$22 per oz. to US$10.80.

The average price for silver in 1980 was US$21 per oz. per oz. — a solid figure to be sure, but nowhere close to the US$50 neighbourhood that some dream of silver residing in.

That is not to say, however, that Christian isn’t bullish on where silver prices will end up.

Going back to his theme of comparing silver to gold, he noted that while there is as much as 2 billion oz. of gold bullion in the world’s gold reserves, there isn’t nearly that much in silver, making it “a lot more interesting.”

That is, unless all the vanishing silver were to reappear.

In a lighter moment, Christian told the crowd that while 90% of the historical gold production is accounted for, only 50% of silver is.

The reason for the disparity? People don’t value their silver as much as they do their gold.

If prices keep climbing however, one day soon they just might.