GFMS: silver to rise in 2008

METALS COMMENTARY

Silver’s annual average price is expected to rise 16% in 2007, according to a study in the latest issue of GFMS Quarterly, put out by the metals research firm.

The report, produced by Sierra Highcloud, a metals analyst at GFMS, forecasts fabrication demand to rise 2% this year. That being said, the analyst doesn’t think silver’s substantial price increase since 2000 will have a large impact on demand.

The study suggests investment demand is the root of the price strength, with the white metal rising to peaks of well beyond US$15.50 per oz. in November.

Supply

Mine production is forecast to increase by just over 3% this year. In 2008, output is expected to rise far more strongly, possibly by more than 6% year-on-year.

Scrap supply is expected to decline this year. GFMS cites a reduction in the quantity of silver recovered from photographic waste as the cause.

Government sales are expected to fall by as much as 50% year-on-year. GFMS cites markedly lower sales from China and the absence of Indian government disposals this year.

Demand

Next year, demand is expected to suffer due to higher prices (and high price volatility) and a marked slowdown in gross domestic product worldwide and industrial production.

Industrial demand is expected to grow by more than 6% in 2007. GFMS says electrical and electronic uses of silver have been strong this year, but are expected to decline due to a potential cyclical downturn in the electronics industry.

Jewellery and silverware fabrication is expected to grow by 2% in 2007. Demand in most countries hasn’t been affected by silver’s price increase, with the exception of India, where demand has fallen. The report cites “a secular shift in investment favouring silver bullion over high-carat jewellery” as the culprit.

Photographic use of silver in 2007 has fallen by nearly 10%. Digital technology and streamlined use of silver in products has contributed to this decline.

Investment

In 2007, investment has been the biggest factor in the rise of the silver price to around US$13.40 per oz. this year, a 16% gain over the average price in 2006.

Most investors expect to continue buying in 2008.

According to GFMS: “Rising investment next year should be more than enough to offset the headwinds from higher mine production and an expected fall in fabrication demand.”

As a result, the average silver price is expected to advance further in 2008, and to trade in the US$13-17 range.

— The preceding is an edited version of an article that appeared in the December 2007 edition of GFMS Quarterly.