SILVER NEWS AND ANALYSIS
$20/OZ POSSIBLE AGAIN THIS YEAR
World Silver Survey authors say silver outlook is still positive
As the Silver Institute and GFMS released their annual World Silver Survey today, no big corrections in silver prices are anticipated this year, as investment money is expected to continue to flow into silver ETFs.
Author: Dorothy Kosich
Posted: Wednesday , 07 May 2008
RENO, NV -
While silver soared above the $20 per ounce level in March and averaged $13.38 per ounce last year, GFMS Executive Chairman Philip Klapwijk said the price outlook for silver is "still pretty positive" although he expects a correction "soon."
In an interview with Mineweb Tuesday, Klapwijk suggested that if gold makes another run at $950 to $1,000 an ounce, silver could definitely hit $20 per ounce again this year.
Klapwijk said GFMS believes that no big corrections in metals prices are expected to occur, while more investment money is still going into commodities. Although a big build up of long positions through silver ETFs has occurred, GFMS has not seen a sign that sales are brewing.
The Silver Institute and Klapwijk are scheduled to present the World Silver Survey 2008 this morning in New York City.
Among some of the report's findings:
ü Silver mine production is expected to record a sixth consecutive increase and even accelerate this year as several new major mines come on stream.
ü The growth in industrial demand for silver is definitely off-setting the impacts of dwindling silver consumption in photography although photography still comprises 16% of silver consumption.
ü Silver price gains remain impressive, with 2007's annual average representing a 23-year high. Price volatility was markedly lower last year at 26% compared with 2006's 45%.
ü World silver cash costs increased 43% in 2007, due to cost increases in labor, consumables, and energy.
ü Net investment demand is a relatively small item within silver's overall supply/demand balance. "However, it is our contention that investors ‘punch above their weight' when it comes to price determination-something that was very much helped by the only limited short-term price sensitivity of the other supply/demand variables."
ü Silver investment activity in 2007 closely followed gold's lead. However, throughout 2007 silver tended to underperform gold.
ü Investors have not been the sole drivers of silver prices. Fairly high levels of producer de-hedging and the resilience of fabrication were also instrumental.
INVESTMENT
GFMS suggests that the outlook for basic materials should remain positive in the near-term, "a premise based on market tightness, which has been driven by the structural shortfalls in the supply and an unrelenting rise in demand across much of the sector."
"Silver stands to benefit from this, especially if pension funds maintain strong interest similar to that witnessed in 2007, as the Swiss-based Novartis and California's CalPERS both signaled a growing appetite for diversifying further into precious metals and other commodities," GMFS advised. "This could take the form of either index vehicles or, more importantly perhaps for silver, ETFs."
"Going forward, GFMS believe that as long as gold prices remain strong, the case for silver investment will not fade. Based on our expectation for the rally to continue at least to the end of the year and quite possibly into 2009, our projections see silver investment demand and price strength persist throughout the period.
"Nevertheless, the substantial speculative component of investment demand will most likely mean that occasional short term liquidations, such as the one that took silver from a peak of nearly $21 on 17th March to less than $17 within ten trading days, will continue to take place," according to the survey.
The survey found that the persistence of strong commodity prices, despite a slowdown in the global economy, continues to attract speculators to the wider complex. Although this benefits both gold and metals prices, "as we have witnessed in 2008, it tends to help silver ‘catch up with' and even outperform gold. (This is partly due to a good number of investors trading the gold: silver ratio, as well as the fact that some speculators prefer to trade silver because of its higher price volatility.)"
Despite the resounding success of silver ETFs and their contribution to the rise in silver prices, GFMS added a note of caution. "Although the success of the ETFs has undoubtedly made a key contribution to the silver bull market since their launch, they may pose a threat to prices going forward. Despite the resilience to liquidation that positions in ETFs have shown so far, this could change if prices in future were to enter a secular decline."
PRODUCTION
Global mine production rose for the fifth consecutive year to 670.6 million ounces in 2007 on the back of strong growth in Chile, China and a recovery in Australian output. However, North American silver declined "as a precipitous fall in Canada wiped out gains in the United States and Mexico," according to the survey.
Latin American production rose by 17.1 million ounces in 2007. Chile reported the strongest gains with silver production increasing 20%, the strongest increase seen in any single country last year.
The main contributor to the production increase in Asia was China, which maintained its position as the third largest producer of silver in 2001 with a growth of 7.1 million ounces.
African silver production fell 12% to a total of 13.2 million ounces in 2007. Morocco remains the region's most significant producer although output decline 7% last year.
Looking to the end of the current year, global silver mine production is expected to continue to climb towards the 700 million ounces mark as major projects come on stream, primarily in the Americas, to supplement the substantial ramp up activities underway at a number of operations.
"Outside the Americas, output in other key silver producing countries is expected to remain firm with the Kupol project in Russia's far east due to begin commissioning in the near term, along with a return to normal operations at Kazakhmys' Abyz and Zhezkagan," according to the report. "Meanwhile, China's ongoing growth is expected to be maintained with further increases in the output of silver as a by-product of base metal mining."
Cash costs at primary silver mines rose to a weighted average of $1.52/oz. "It should be kept in mind, however, that 70% of the world's silver production in 2007 was sourced as a by-product of other metal mining," according to GFMS.
Net supply from above-ground stocks declined 8% to 173.1 million ounces in 2007. "The decline was led by lower net government sales and rising producer de-hedging, which were largely offset by lower implied net investment."
Government stocks of silver are estimated to have decline by 42.3 million ounces to a year-end 2007 level of 95.7 million ounces.
FABRICATION DEMAND
Jewelry fabrication slipped 2% in 2007 while global silver off take continue to weaken with 9-million ounce attrition in just two years.
Industrial fabrication grew for the sixth year in success with a 7% increase last year to 455.3 million ounces. Electrical and electronics fabrication accounted for the greatest increase. India, China and the United States accounted for around 70% of the world rise in all industrial uses, according to the survey.
Global coin fabrication fell by 2 million last year, due to lower minting in Germany and the United States.
To purchase a copy of World Silver Survey 2008, go to the Silver Institute's web site www.silverinstitute.org
