St. LOUIS () -- Today, GFMS presented its , offering supply and demand forecasts for 2006 and expectations for the silver price over the next few months. In speaking with Resource Investor, Philip Klapwijk, Executive Chairman of GFMS, said investment demand has taken over the silver market.
"The market has in fact shifted quite dramatically in the last few years from one where investors' bullion stocks (in aggregate) were running down to one where these stocks are being added to on a net basis. That's what has drive up the silver price," he said.
The silver price has risen 16% in the last two months and 30% so far this year. The price has averaged $11.30, up 58% year-on-year.
GFMS said investment demand has driven the price higher and could take silver back to levels hit in mid-May in the next few months. Although the consultancy expects significant price volatility in the near term, a spike to $15/oz is "very possible."
According to the report, investment demand has risen in 2006 for the third consecutive year and may well exceed 80 million ounces this year. The early part of 2006 was dominated by speculative buying, mainly by hedge funds ahead of the launch of the world's first silver-backed Exchange Traded Fund (ETF).
Klapwijk noted that there was a "big jump in investor interest ahead of the ETF and then further growth in demand as the ETF was launched, and in succeeding months."
Barclays' iShares Silver Trust [AMEX:SLV] launched on after much controversy in the market, with silver users pinned against silver producers. The ETF began trading with about 30 million ounces in trust, but has since grown to almost 105 million ounces to date. Total net assets amount to roughly $1.35 billion.
David Morgan, author of "The Morgan Report," told RI that demand for silver has "certainly increased with the availability of silver for investment with the iShares Silver ETF and other silver related investments that have manifested all over the world the past couple of years."
Morgan said the ETF eliminated two concerns many large potential investors in silver voiced: how or where to buy silver, and once purchased, where to store it.
"As more money seeks the profit potential of silver it is easy to extrapolate the silver ETF should continue to increase the silver holdings," he said.
According to GFMS, Loco-London bullion stocks have increased considerably due mainly to investor demand for the ETF, whose inventory at the end of October had reached nearly 3,259 tonnes.
"Things have been helped too by restrained growth in mine production and very robust overall fabrication demand, especially given the huge hike in the silver price," said Klapwijk.
However, the forecast for next year's supply/demand fundamentals is less bullish for the price.
Mine production is forecast to increase by some 4 million ounces of silver or 0.6% this year. But the outlook for 2007 is a far greater increase of around 16 million ounces, with strong growth forecast 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. Important to note, however, that a large share of silver scrap supply is from recycled photographic products, which is experiencing a secular decline.
Government sales appear to be on track for a marginal increase. According to GFMS, there is strong evidence that Chinese and Russian sales have held up in 2006 due to the attractive price level, but India looks likely to sell up to 30 million into its domestic market.
On the demand side, fabrication is forecast to fall by just over 3% this year, nearly 28 million ounces from 2005.
Jewellery and silverware fabrication alone is forecasted to fall by 8% year-on-year globally, due largely to lower Indian fabrication. According to GFMS, the Indian market continues to shift in favour of investment in bullion instead of high carat jewellery.
But along these lines, coin minting looks to have enjoyed a strong year in 2006, with a sizeable gain in silver use forecast.
Industrial demand is expected to end the year with a 1% gain, but has slowed in recent months as compared to the first half of the year.
Demand is expected to fall in 2007 under the impact of much slower growth in global industrial production and a weaker year for the electronics industry.
"Industrial demand, which makes up half of total fabrication, is vulnerable to a slowdown in world GDP growth and a downturn in the electronics cycle next year," the report noted.
Photographic use of silver alone is expected to drop by close to 11% in 2006, as the industry switches to digital technology.
According to GFMS, investment demand remains the main driver of the price and has raised silver to "well above the equilibrium level that would likely prevail in the absence of investment."
Morgan quite simply said investment demand is going to take silver "where it's going to go."
"Since investment demand is the smallest segment of silver demand unlike gold, which is almost entirely investment driven, it becomes a question of much investment potential does silver really have? If silver investment becomes as popular as gold investment, the price will be far higher than it is today," he concluded.
GFMS said it believes that silver is more likely to follow gold higher, than base metals lower over the next year.
December silver futures closed at $12.89 an ounce, up 0.5 cent, today on Nymex, while gold closed down down 50 cents at $625.30 an ounce. December copper futures added 1.4 cents to end at $3.089 a pound.