St. LOUIS (ResourceInvestor.com) -- While the prices of silver have jumped to 26-year highs, demand for the precious metal has dropped by 13.8 million ounces according to a report by metals consultant GFMS Ltd.
According to the report, in 2006 the average silver price was $11.55 per ounce. This number is up 58% from the previous year. Increases in silver prices faired better than other precious metals such as gold and platinum. The gold price jumped 36% from last year and platinum jumped 27% from last year.
But even with higher prices, moderate growth is expected from silver, the report says.
“On the assumption that there is no further large rise in silver prices, our view is that there is scope for moderate growth in global offtake over the next few years,” the report says. “We do not expect much of an advance in Europe or North America but neither do we believe that there will be a major reversal in consumption in these regions. Meanwhile, after suffering massive setbacks in recent years, consumption in India should stabilize and even recover somewhat. Furthermore, if silver prices were to fall back then demand in India would be expected to respond positively.”
Demand
While total demand dropped about 1.5% since last year, industrial demand has continued to increase as silver in industrial components, according to the GFMS Limited report. In 2006, industrial demand for silver saw a fifth consecutive year of growth, despite the record high average silver price.
Some analysts believe that as more and more of the public pursue silver investments, they will benefit greatly.
“World Net Silver demand in 2006, as a function of U.S. money in the banks, is [$739/$11,500,000], which is 0.006% of U.S. money,” said Jason Hommel of Silverstockreport.com. “If the wider public became aware of the silver fundamentals, net silver investment would be much higher, and so would silver prices. With a market this tight, and the world this unaware, the silver price will probably rise much higher than anyone can predict.”
Photographic demand continued to fall, decreasing by 10% in 2006 to 145.8 million ounces. The bulk of the decline was the result of lower consumer film demand due to growth of digital imaging technology.
World silver jewellery fabrication rose from 146.4 in 1996 to 171.8 million ounces ten years later. In terms of the global supply/demand picture, in 2005 silver jewellery accounted for one-fifth of total fabrication and 19% of global silver demand.
However, much of the investment demand last year can be attributed to the successful launch of Barclays' Global Investors iShares Silver Trust Exchange Traded Fund (ETF), which was introduced in late April 2006.
Launched with just 1.5 million ounces of silver in trust, the fund held 120 million ounces at the end of last year and now holds more than 135 million ounces. Global silver supply amounted to 912 million ounces last year, which means the silver ETF made up 14% of world output.
Supply
Global silver mine production edged up fractionally in 2006, with notable gains in Latin America and Asia. Total silver mine production reached 646.1 million ounces last year, with Peru, Mexico, China, Australia and Chile the top five silver mining countries. Last year, silver generated at primary mines fell by 10% to 161.4 million ounces, representing 25% of global silver production. Cash costs at primary silver mines contracted last year by 16% to average $2.74 per ounce.
The supply of silver from above-ground stocks on a net basis dropped by 4% in 2006 to 194.4 million ounces, according to the report. The decline was the result of a shift of net producer hedging to the demand side. Total scrap supply provided the market with 188.0 million ounces of silver in 2006, virtually unchanged from 2005.
Net government sales crept up to 77.7 million ounces in 2006. The increase in government sales in 2006 was the result of marked increases in Russian sales, coupled with ongoing sales from Indian government silver stocks. Elsewhere, a decline in sales from China partly offset these increases.
Conclusion
CPM Group put out its own silver study earlier this month. According to Jason Hommel of Silverstockreport.com, the notable difference between GFMS report and the report presented by the CPM Group earlier this month is the estimated annual mine supply.
GFMS lists mine production for 2006 at 646.1 million ounces while the CPM group estimated 2007 mine supply to increase 3% to 520 million ounces. GFMS put 2006 net investment demand slightly lower than in 2005, while the CPM group listed net investment demand up in 2006.
“Maybe I don't understand the nuances of how they are counting, but that's a big difference,” Hommel said.
GFMS puts 2006 net investment demand slightly lower than in 2005, while the CPM group listed net investment demand up in 2006.
“In sum, both surveys show that the silver market is very small, and very tight,” Hommel said. “Silver consumption vastly exceeds annual silver mine supply, and the difference is largely met by silver recycling.”
