LONDON (ResourceInvestor.com) -- The silver price enjoyed four consecutive years of double digit gains from 2004, averaging $13.38/oz in 2007, a 27 year high. It began 2008 just shy of $15/oz but then rocketed 40% to peak at almost $21 on 17th March only to fall below $17 by the beginning of April.
Nonetheless precious metals consultancy GFMS, who launched the World Silver Survey 2008 at the Silver Institute in New York today, anticipates that investors will drive silver back towards $20/oz by the end of the year from its current level of $16.69 even though the supply/demand fundamentals for the metal are likely to be weaker than last year.
A key development in silver’s changing fortunes, argues GFMS, has been the pronounced shift in investment behaviour in the silver market.
The market has moved from a situation of net disinvestment in the 1990s (when there was dishoarding after the boom/bust of the 1970s/1980s) to net investment. The investment boom, which began around 4 years ago, received a huge boost in 2006 from the launch of the ETFs in silver.
Even though the annual investment figures remain small relative to other components of supply and demand (and to investment in gold) GFMS contends that investment has “punched above its weight” in the determination of the silver price.
Investment demand began 2008 strongly. ETF holdings, for example, rose 32 million ounces (16%) to 204 million ounces in the first quarter of 2008. There has been some reversal in demand recently which could be extended. But medium term prospects for silver investment demand remain positive because of the weak U.S. dollar, the ongoing credit market crisis, growing inflation fears, the strength of the gold price and likely further inflows of money into the commodities sector.
However the fundamentals for silver are likely to weaken. While there are likely to be solid gains this year in mine production demand is set to weaken on the back of higher prices and lower economic growth. The weaker economy will particularly impact on the industrial demand for silver which accounted for more than half of all demand in 2007.
Investment demand will therefore need to be strong to counter the deterioration in the balance, although for the reasons listed above GFMS argues that this will be the case though occasional short term liquidations, such as the one in late March will continue to take place.
The World Silver Survey, now in its 19th year, examines the silver market in great detail. A few of the themes from GFMS’ presentation are expanded below.
There has been a significant change in the structure of fabrication demand over the last decade. Industrial applications have been the star performer rising from a 38% share of fabrication demand in 1998 to 54% in 2007. Photographic demand has slumped from a 27% to a 15% market share over the period.
Fabrication demand is expected to weaken by 8% (60+ million ounces) this year with falls in each of the major components. GFMS notes however that industrial demand has proved remarkably resilient to date in 2008 possibly because of the de-coupling of the developing markets.
Mine production of silver has grown for five consecutive years, rising by 4% in 2007. Growth from primary silver mines was particularly strong in 2007, up 11% year-on-year while silver as a by-product from gold, lead and zinc mines rose just 1%.
Production growth is expected to accelerate to 6% (+40M oz) in 2008 on the back of a number of new projects, ramp ups and expansions. Mines contributing to the growth will include:
Total supply to the market is forecast to rise by around 2%. Scrap supply, however, is expected to be broadly flat while government sales if anything may decline slightly.
The market, therefore, may move from balance in 2007 into surplus in 2008.
If the price is to be maintained or to rise demand from investors and/or dehedging will have to grow. GFMS reckons that while not impossible the probability of substantial further dehedging is low as the outstanding producer book is already quite low. Investment demand however, particularly in the form of ETFs is rising and prospects seem positive for the rest of 2008 and 2009, albeit with the likelihood of periodic liquidations.
