St. LOUIS (ResourceInvestor.com) -- A dismal day for silver marked the release of the World Silver Survey 2006 today by GFMS on behalf of the Silver Institute. July silver futures lost 65.5 cents to close at $12.515 on NYMEX after touching a low of $12.42. However, the outlook is anything but bleak, according to this year’s report.
Last year, the silver price experienced a 10% increase over the average 2004 price of $6.65 per ounce, to an average of $7.31 per ounce, according to the report. In 2006, the silver price has already reached levels not seen since February, 1983.
Philip Klapwijk, executive chairman of GFMS Ltd., told sources that he expects the price of silver this year to exceed last year's average.
“Year to date, the price through April was above $10,” he said. “I assume May-June will be above $10 as well, so it will be difficult not to see a price average significantly above the $7.31 of last year.”
There has been a structural shift in silver investment over the last decade, the report notes. The sustained net disinvestment that characterized the market in the 1990s has given way to substantial net investment in recent years.
Investment
The primary factor driving the stronger silver price is the reawakening of investment demand, wrote GFMS. According to the report, net investment in silver stood at 47.5 million ounces in 2005 - an increase of 23% from 2004.
Front-running investment ahead of Barclays’ silver ETF was “an important source” of this renewed interest.
“As the product’s launch became more certain, a wave of new money came into the metal,” according to the report.
Barclays’ iShares Silver Trust [AMEX:SLV] currently has amassed 72,992,051 ounces of silver and about $939 million in total net asset value since inception on April 28.
According to the report, the rise in investment demand can also be seen in the futures market, with total futures volume reaching 5.5 million contracts, representing 27.7 billion ounces of silver. This was an 11% gain on 2004’s “already impressive figure.”
Important to note that NYMEX has already raised margins for silver futures nine times this year.
However, GMFS noted that the bulk of the investment activity in silver has come from institutional investors, with a subsidiary role played by individual investors. Hedge funds, commodity trading advisors and some banks’ proprietary traders were the likely the biggest players.
“Small private investors so far have had little impact in the market, although there is arguable some scope for that to change in the future...,” GFMS wrote.
Silver’s “widely publicized” advance, however, along with the launch of the ETF, will entice more retail investors to enter the silver market, according to GFMS.
In fact, according to the latest edition of “Silver News” by the Silver Institute, GoldMoney.com sold more than 1.3 million ounces of silver to small-scale investors in the first quarter of this year.
“We exceeded our expectations, and we believe sales will continue to do well,” said James Turk, the company’s founder and chairman. “As people become more worried about the U.S. dollar, they look to buy precious metals. This is a way for them to buy silver.”
But although investment interest was the main driver of demand last year, GFMS said advancements in industrial uses of silver will to drive demand in the future as well. New uses for silver as a catalyst, biocide and conductor of electricity will continue to be implemented.
“The rally was overwhelmingly the result of a surge in investor interest, though strong industrial offtake, an initially stable jewellery sector and a muted scrap response provided a reasonably firm base for the rally,” wrote GFMS.
And this brings us to fabrication demand.
Demand Fundamentals
Total silver fabrication demand, led by surging industrial demand, rose in 2005 to the highest level since 2001, according to the report. Total silver fabrication rose by 3% in 2005, to 864.4 million ounces, largely due to a 10% rise globally in electrical and electronics demand.
According to the report, industrial fabrication contributed the most to the increase, with its sharp 11% rise (41 million ounces) to record levels of 409.3 million ounces. Total fabrication demand is now 47% up from 37% ten years ago.
Indian offtake in industrial fabrication rose an impressive 58% last year, while Japan experienced a 15% increase; China posted a 6% increase to hit 31.8 million ounces; and the United States topped 100 million ounces.
Jewellery and silverware fabrication posted a modest increase by 1% in 2005, to 249.6 million ounces, with much of the growth occurring in China and India, according to GFMS. Chinese silver jewellery and silverware demand rose by a stunning 20% in 2005, to 16.4 million ounces, while Indian demand rose by 8.5% to 48.9 million ounces.
Photographic demand decreased by 9%, or just over 16 million ounces last year, to 164.8 million ounces, as output of colour film continues to decline on further digital inroads. Photographic demand accounted for just 19% of fabrication demand in 2005.
Total coins and medals fabrication demand decreased by 4% to 40.6 million ounces. Lower minting in a number of European countries, together with some weakness in China, offset increases in the U.S. and Germany.
Supply Fundamentals
For the 17th consecutive year, a structural deficit was recorded. The gap between fabrication demand and conventional supply (mine production and recycled scrap) was 35.5 million ounces in 2005.
Global mine production rose by a solid 3% to a new high of 641.6 million ounces in 2005, pushed by strong growth in Mexico and Australia.
Peru, Mexico, Australia, China and Chile took the top spots on the list of top producing countries, with Russia and Kazakhstan making strong advances. However, sizeable losses were recorded in Canada and Poland.
Silver generated at primary mines increased by 8% last year, to reach 188.2 million ounces, representing 29% of global silver production.
Next year, according to the report, mine production is expected to post a more “muted” gain of 1%, or 6.4 million ounces year-on-year.
Supply of silver from above-ground stocks rose marginally to 222.8 million ounces, due to higher producer hedging, scrap supply and government sales.
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Producer hedging rose by over 50% to 15.1 million ounces, in part through new project hedging.
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Net government sales rose just 2% to 68.0 million ounces as the emergence of Indian selling outweighed lower Russian and Chinese sales. The share of total supply from government sales stood at 7% in 2005.
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Scrap supply rose only 3% to 187.3 million ounces, partly as lower photographic scrap largely balanced higher jewellery scrap.
Total scrap supply is estimated to have provided the market with 187.3 million ounces, inching up only 3% from 2004, despite the much stronger silver price.
Near-Term Outlook
Although silver has dropped back considerably from its high of $14.94 hit on April 12, the spot price is still up $3.76 or 29% from the start of the year.
In an alert to subscribers, Peter Grandich, Editor of the “Grandich Letter,” said a “sentiment indicator” suggested the correction is all but near its end - hours, days or few weeks away at most.
“Silver is likely to ‘tag along’ with its kissing cousin gold,” Grandich told RI, indicating that he sees gold breaking out very soon.
“On the one hand, a softening world economy is bearish but the belief in gold’s next up leg will be led by its ultimate alternative currency position, should allow silver to ride gold’s coattail.”
