Compared with gold, the action has been in silver for much of the past year.
In fact the surging demand from investors of all sizes is the reason why silver prices jumped 78% over most of 2010 (three times the size of gold’s rise), and why prices have gone on with that run this year.
Solid demand from the industrial sector was also significant, but the big driver was the explosion in demand from investors put off by gold’s higher prices and wanting a bit more investment bang for their bucks (and better leverage) from cheaper silver.
According to World Silver Survey 2011, released this week by the Silver Institute (and prepared by GFMS), silver posted an average price of $US20.19 an ounce last year which was only surpassed in 1980 during the last silver craze when the world price got to a still incredible $US50 an ounce.
The 2010 average was a marked increase over the $US14.67 average price in 2009.
In the March quarter of this year, the average London price is $US31.86, while the metal has traded around $US40 an ounce this month.
The soaring price and relative attractiveness saw world investment rise by an impressive 40% in 2010 to 279.3 million troy ounces (Moz), resulting in a net flow into silver of $US5.6 billion, almost double 2009’s figure.
The Silver Institute study shows that exchange traded funds (ETFs) were a major driver of this action in 2010, with global ETF holdings reaching an impressive 582.6 Moz, representing an increase of 114.9 Moz over the total in 2009.
The iShares Silver Trust accounted for almost 40% of the increase, with other notable gains achieved by Zurcher Kantonalbank, ETF Securities and the Sprott Physical Silver Trust.
A significant boost in retail silver investment demand paved the way for higher investment in both physical bullion bars and in coins and medals in 2010.
Physical bullion bars accounted for 55.6 Moz of the world investment total last year.
Coins and medals fabrication rose by 28% to post a new record of 101.3 Moz.
In the US, over 34.6 million US Silver Eagle coins were minted, smashing the previous record set in 2009 at almost 29 million.
Other key silver bullion coins reaching milestones include the Australian Kookaburra, the Austrian Philharmoniker, and the Canadian Maple Leaf–all three posting record highs in 2010.
Demand from fabricators was solid, but nowhere near the level from the investment sector.
The study shows that total fabrication demand grew by 12.8% to a 10-year high of 878.8 Moz in 2010.
This was led by the industrial demand category.
Last year silver’s use in industrial applications grew by 20.7% to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011.
Jewellery demand edged up 5%, the first substantial rise since 2003.
Photography fell by 6.6 Moz, the smallest loss in nine years, as medical centres deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.
Turning to production, the Silver Institute study shows that silver mine production rose by 2.5% to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina.
Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4% last year.
Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile.
Global primary silver supply rose 5% to make up 30% of total mine production in 2010.
Primary silver mine cash costs remained relatively flat year-on-year, falling by less than 1% to $US5.27/oz. from a revised $US5.29/oz. in 2009, the Institute said.
Net silver supply from above-ground stocks increased to 142.9 Moz in 2010, primarily due to higher scrap supply, a shift of net-producer hedging to the supply side, and a considerable rise in net-government stock sales.
Last year saw a 14% rise in scrap supply over 2009 as gains in industrial and jewellery recycling exceeded an ongoing decline in recovery from photographic sources.
Net government sales of silver rose to 44.8 Moz, primarily the result of increased sales from Russia, with China and India remaining relatively silent for the second consecutive year.
Some forecasters say that even though investment demand remains strong, the supply of silver is better placed than gold, with more to come out of the scrap sector if the demand is there.
Some claim the market is heavily overbought and silver will slide back to $US20 an ounce or more.
Let’s see what happens when the US Federal Reserve ends (and if it ends) its second quantitative easing in June.
That could change the dynamics of both the gold and silver markets.
