The London-based metal consultancy, GFMS, says it can see a case for silver to top the $US20 an ounce level "in the short term" amid a continued surge in investment. It says the "recovery in fabrication demand should support prices in 2010 even as investor interest eventually moderates".
The price rise above $US20 an ounce might only last a short while and GFMS warns that favourable conditions for investment in silver might change next year for the worse and the price fall sharply to levels around $US15 an ounce, or a bit less.
GFMS said last week in its interim silver market review that it sees no significant increase in supply this year, but a fall in industrial demand, which will be offset to an extent by rising demand from investors.
Fabrication demand is projected to fall by almost 11% this year, GFMS said.
That’s because of the impact of the recession on industrial useage and the ongoing losses in photography, which will "be only partly compensated by robust growth in coins and a modest rise in jewellery and silverware fabrication".
Supply is expected to rise as a result of a small increase in mine production this year, offset by lower supply from scrap and government sales.
Investment has surged this year and "is expected to drive silver prices higher, with the $20 level likely to be breached in the short term".
"Conditions should eventually become less supportive of investment demand during the course of next year," the consultancy warned.
It sees 2009 prices as averaging $US14.78 an ounce, "marginally down year-on-year".
"GFMS’ Base Case scenario is for the annual average price in 2010 to fall slightly from this year’s level," it says.
The key points from the interim silver market review are as follows:
Supply
Total supply to the market is forecast to be again virtually unchanged year-on-year in 2009.
Marginal growth in mine production is being offset by lower supply from scrap and government sales.
Mine production is forecast to rise moderately, by some 12 Moz (385 t) or almost 2% this year.
Supply from primary silver producers is forecast to increase, notably from Pirquitas, San Bartolomé and Manantial Espejo.
Strong growth is expected from the gold sector, and Mexico in particular, including Couer d’Alene’s Palmarejo, Minefinders’ Dolores and Goldcorp’s Peñasquito oxide phase and Agnico-Eagle’s Pinos Altos.
Elsewhere, Russian production will receive a boost from a full year of production at Kinross’ Kupol.
Scrap supply is expected to fall by almost 4% this year, due to an ongoing reduction in the amount of silver recovered from photographic waste, the main source of recycled metal.
Government sales have dropped sharply in 2009. Russian state disposals appear to have again accounted for the bulk of government sales.
Demand
Fabrication demand is forecast to have fallen steeply from 2008’s level, with expectations currently for a drop of around 11% year-on-year. A fair recovery is forecast for 2010.
Industrial demand has fallen heavily in 2009 year-to-date, due to the severity of the economic downturn, which affected electrical and electronics demand particularly badly in the first quarter.
GFMS are currently forecasting a full year decline for industrial demand of around 20%.
In 2010, however, a rebound in offtake is expected, given an improvement in global GDP and industrial production growth and stock replenishment.
Jewellery & Silverware fabrication, on a combined basis, is forecast to rise by nearly 2% in 2009.
Silver has benefited in several important jewellery markets from substitution at gold’s expense.
However, the weak economy and high silver prices have also restrained growth in demand.
Moreover, some of the rise in fabrication reflects an increase in trade stocks in India, where surging local prices have constrained final demand from consumers.
Photographic use of silver is expected to drop by close to 16% in 2009 as demand continues to be affected by the switch to digital technology.
Silver use in the cinematic industry has also been hard hit, as a lack of financing has led to a drop in the number of films produced.
Coin minting has risen strongly this year, with a full year gain forecast for 2009 of some 19%.
Producer hedging looks set to remain firmly on the demand side this year, but de-hedging is considerably less than the elevated level recorded, for instance, back in 2007.
Investment
Investment demand has risen considerably in 2009 and, including coins, is currently projected to exceed a net 207 Moz (6,440 t) this year.
The early part of 2009 was dominated by demand for physical metal and ETFs, as investors sought refuge in silver when fears over counterparty risk and the financial system remained rampant.
Following a ‘summer lull’, since September there has been a robust expansion in investors’ long positions in all investment arenas.
Silver has benefited from gold’s strength, US dollar weakness, some investors’ rising concerns at the potential for higher inflation in future and the general growth in investors’ interest in commodities in a very low interest rate environment.
Overall, the January-October period saw a 100 Moz (3,110 t) rise in ETF holdings coupled with an increase of 171 Moz (5,306 t) in the ‘investor’ net long position in Comex futures. Investors’ bullion stocks have increased substantial
