Mexico Capitalizes on Silver’s Rise

As the second-largest silver-producing country in the world, Mexico is enjoying historic price levels for silver, and that’s good news for the economy.

“Silver prices have been exceptionally lucrative in recent years, including this one,” says Patricia Mohr, vice-president of economics at Scotiabank in Toronto. “There has been a great deal of investor interest.”

Prices for the industrial and investment metal soared 58% last year to an average of US$11.55 per oz. — a level not seen in 26 years. The annual price increase for silver surpassed that for gold (36%) as well as platinum (27%). In 2005, silver hovered at an average of US$7.31 per oz. (see tables on page B16).

One of the reasons why silver prices have moved up so fast, Mohr points out, was Barclay Capital’s launch in April 2006 of Global Investors iShares Silver Trust Exchange Traded Fund (ETF). The ETF absorbed a huge amount of silver into its allocated accounts, reducing liquidity in the physical silver market.

The fund currently holds about 135 million oz. of silver, according to the Silver Institute, a Washington, D.C.-based non-profit association of silver miners, refiners, fabricators and manufacturers. (The ETF concept has been so popular, it has spread to platinum and palladium).

“There was a surge of interest by U.S. retail and probably international retail buyers when the silver ETF was first introduced onto the American Stock Exchange,” Mohr says.

Another factor behind higher silver prices has been strong industrial demand, which registered growth in 2006 for the fifth year in a row. Silver is a key ingredient in many industrial applications and that list is growing.

“There are a lot of new applications for silver such as in medicine and electronics, which are more than offsetting the drop-off in traditional photography,” Mohr says.

Photographic demand decreased by 10% in 2006 to 145.6 million oz. silver.

Total industrial applications for silver last year posted a 6% year-on-year gain to 430 million oz. silver. China registered the strongest annual industrial demand growth at 10.4%, followed by Japan with 10%, and the U.S. with 6%. The Silver Institute also found that cash costs at primary silver mines contracted last year by 16% to average US$2.74 per oz.

In terms of investment behaviour, CPM Group, a leading commodities market research and consulting firm, notes that the single most important development for silver prices since 1990 has been that investors shifted from 15 years of net selling to net buying in 2006 — the first time since 1979.

Moreover, investor buying habits are shifting in developing economies, according to Jeffrey Christian, managing director of CPM Group.

“In the past, large volumes of gold and silver jewelry were bought as forms of savings and investments,” Christian said in a speech earlier this year. “They still are, but the volumes are falling and will continue to decline as investors from the Middle East and India to China and East Asia shift from buying precious metals jewelry to buying bullion bars, coins, and medallions, and investing in other financial assets.”

At the same time, he noted, institutional and high net-worth investors in developed economies are showing an increasing interest in precious metals as investments.

The weakness of the U.S. dollar, particularly against the euro, has also served to drive up silver prices. (The greenback weakened further in September, after the U.S. Federal Reserve announced it would cut its key overnight lending rate by half a percentage point to 4.75%.)

Because silver can be an important store of value, declines in the U.S. dollar historically have coincided with silver prices moving upward. Between 1971 and 1981, for instance, when the U.S. dollar lost more than half its value, silver prices rose nearly five times, according to the Silver Institute.

Nevertheless, Mohr expects silver prices are likely to return to more moderate levels when new supply comes on-stream, such as from Apex Silver Mines’ (Sil-X) San Cristobal project in Bolivia.

“It’s a very big mine, so I think it will damp the price a little,” she says.

San Cristobal, Apex Silver’s 65%-owned property, in southwestern Bolivia, is considered to be one of the world’s largest silver-zinc-lead development projects, with proven and probable reserves of roughly 450 million oz. silver. The project — in which Tokyo-based Sumitomo (SSUMF-O) owns the remaining 35% — started turning out silver in August.

For now, however, Mexico and other top silver-producing countries can continue to enjoy silver’s astronomical ride. Prices for silver on the London fix — the key bellwether for silver prices — reached $13.49 per oz. on Sept. 21.