-- Posted 1 June, 2009 | | Discuss This Article - Comments:

This is a snippet from a recent issue of the Silver Forecaster with

  Subscriber-only parts excluded.

Investment demand.

There is no reason why long-term investment demand for silver should not continue in the rest of 2009.    Investor activity that was the main driver of high silver prices last year will continue to demonstrate strength this year.   At the Silver Forecaster, we agree with this conclusion but suggest that the general tone of the market will become more volatile as uncertainty grows, punctuated by bouts of optimism encouraged by global financial powers and governments.   It must be noted that silver is a ‘poor man’s gold’ in places like India and South America in particular.   In Europe, a market less familiar with the metal as an investment, awareness of silver as such, is growing too.   As the price rises long-term investor’s attention is captured and, if as we believe, the expectation of further price rises is accepted, greater long-term investments are made.   Further, as the liquidity of these funds expands so these shares attract larger and larger investors.

The holdings of silver Exchange Traded Funds increased to $2.9 billion of late [8348 tonnes].   We continue to believe that these Exchange Traded Funds will be the focal point of silver investment, as it is the only road down which major funds are permitted to invest in silver.   We feel they have considerable underutilized space for more silver investments in their portfolios.

The monetary and safe-haven nature of both silver and gold will continue to ascend in the years to come, challenging past price peaks.   This will be supported by the ongoing fiscal stimulus plans in the United States and across much of the rest of the global economy, near zero-interest rates in many advanced countries, ‘quantitative easing' and the Federal Reserve's debt monetization.   These are likely to maintain investor interest and inflows into silver, gold and other precious metals over the medium term as GFMS believes.  

We believe, in view of the structural nature of the globe’s financial woes, that this will continue for the long-term, not only the medium term.   The concept of a global economic recovery does not negate these expectations.   Structural problems have removed a considerable degree of confidence in the future of monetary system.   Until these systems are properly ‘fixed’, there will be scant return of confidence in the future of paper money.

Investment

Activity in coins and medals soared, especially at the retail level in the U.S. and Europe while professional and institutional investment was reflected in the increase in ETF holdings, which during 2008 amounted to 2,894 tonnes. This was equivalent to almost 90% of the amount of metal taken up by the photography sector and 43% more than coin medal investment. Since the start of this year silver holdings in ETFs have continued to increase at a healthy rate, adding 2,121 tonnes to a total of 10,388 tonnes, which is equivalent to five months' industrial demand at last year's rates. Note that these bullion investors are outside the new institutional investor class that have been buying the shares of silver Exchange Traded Funds.   We do believe that these include gold investors alongside the smaller precious metal investor.

While the ETFs, and bars and coins markets experienced "an uninterrupted advance" over the course of the year, the Over-the-Counter (OTC) and futures markets met heavy liquidation in the second half.   The OTC and futures markets experienced speculative buying followed by massive liquidation in the second half of the year, triggered in large part by the collapse of Lehman Brothers and the crisis spreading through the rest of the financial sector.   Silver (and gold) met massive sell-offs as investors looked to raise cash for margin calls and the price tumbled from a July peak of $19.30 to a low in October of $8.80. 

An important point highlighted by the Survey is the change in the nature of silver investment in the wake of the Lehman Brothers collapse.   As investors took fright at the concept of paper, physical metal holdings took priority and the demand was "staggering".   Retail investors, high net worth individuals and the wealth management industry all flocked to the physical arena, with the OTC market one of the casualties of the migration to physical holdings, while the increases in the ETFs encapsulated the stampede into the physical. This was not confined merely to "western" markets and there was an unprecedented level of demand from India. 

This physical investment was characterized by extensive delivery delays, rising premia and, in some cases, extended shortages in popular bars and coins. The US Mint was a case in point, citing "unprecedented" gold and silver coin demand along with "unusually high" demand for platinum; the Mint suspended the sales of some coins in order to concentrate on one-ounce Gold One Ounce and Silver One Ounce coins. The Mint's latest figures show that silver one ounce coins in the first four months of 2009 reached 9.7 million ounces against 5.8 million ounces in the first four months of 2008, and they remained high in the first half of May.    We at the Silver Forecaster have noted that investments in silver are covering investors from the entire investment spectrum from small to large investors.   Never in man’s history have all classes of investor been so well-informed as now.   This has speeded up the flows both into and out of markets of all kinds.  

The Survey notes a structural shift in investment preferences in India over recent years. Bars and coins have been taking increasing favor over the traditional high-carat jewelry. This is partly due to increasing consumer awareness of issues concerning under-carating in the jewelry industry; this was compounded last year by low local silver prices with bullion demand growing "exponentially" and GFMS estimates that it accounted for 53% of overall demand in the Indian silver market last year, surpassing the combined demand from jewelry, silverware and industrial uses. 

This explosion of investor interest was enhanced by low prices, especially with the local price falling below Rp17,000/kg by November, a drop of 35% from the July peak. It looks as if following Indian trade patterns this year will prove particularly instructive.

Purchases of physical silver bullion bars and coins last year soared to levels not seen in decades in the last year.   In India, the cheaper silver saw a return to investor favor often in place of gold.   Indian silver imports increased 103% to an all-time record of 5,048 tonnes [162.3 million ounces] of silver.     With gold prices at present levels, demand for silver relates to disposable income levels, which are relatively static among small investors.   In many cases gold investors have felt it necessary to switch to silver.

It is important to stress that investment demand is now dominating silver.   Any fall off in that demand will undermine the silver price.   A continuation or rise in that demand will send the silver price to much higher levels.   As the economic recovery takes hold other demands for silver [which have fallen only slightly in this recession] are expected to rise healthily.   As silver has shown itself in India to be the poor man’s gold now, we expect that source of demand to keep on rising.   This bodes well for 2009.   So much so that we believe that silver will rise to its historic highs [$25+] by the end of 2009.

Industrial demand

Although the poor demand outlook for silver's industrial applications is set to restrain prices until the economic recovery takes a firm hold of the world economy, this long-term investment demand should continue to follow a similar demand for gold, as it has done over the last few years.  

Surprisingly and as a pointer to the future, the World Silver Survey said global silver fabrication demand declined by a minute 0/9% in 2008 to 25,897 tonnes [832.6 million ounces].   

The largest fabrication drop continues to be recorded in photography, where the pace of decline actually accelerated, as further gains by digital solutions were compounded by the rapid deterioration in the global economy.

Again surprisingly, in spite of silver prices rising by 12% in 2009, silver jewelry and silverware demand fell only a fraction.  The modest scale of losses in both cases, owed much to healthy gains in India.

Meanwhile, industrial demand for silver fell for the first time in seven years, declining 1.4% to 447.2 million ounces with most losses occurring in the fourth quarter in 2008.

China’s remains an importer of silver and a growing one as ‘official’ sales have now stopped and insufficient silver is produced locally to satisfy the huge urban growth programs and economic development there.

New Industrial Uses for Silver to counter Photography Demand fall.

The World Silver Survey highlighted a number of new uses for silver.   The main growth areas in the last few years have largely been in health, electronics, and renewable energy sectors, all of which rely on the properties of the metal as a catalyst, biocide, and for storing or conducting electricity.

Global mine production

 Reported a sixth consecutive annual gain, increasing by under 3% to 21,179 tonnes [680.9 million ounces] and driven by strong production increases in Bolivia, Russia and Peru.   Silver mined as a by-product of gold mining increased 26% last year, while output from copper-silver mining declined by 7% or 11.8 million ounces.

The World Silver Survey forecasts silver mine production to fall slightly in 2009, with output forecast to decline from all by-product sectors except gold.  Declines are expected across most regions, with the exception of Latin America, where growth is forecast to continue.   Growth is also expected to increase in Russia.

It was estimated that net supply from above-ground silver stocks fell 14% to 4,718.51 tonnes [151.7 million ounces] in 2008, primarily due to lower net government sales and a modest drop in scrap supply.

Last year's average price was $14.99 per ounce.

Fabrication

 Contracted by just less than 1% and while this fall remains heavily concentrated in the photographic sector as a result of the relentless onslaught of digital technology, all other areas registered declines.   Silver demand in photography, which twenty years ago accounted for more than 50% of silver industrial demand, has now dropped to just 12½% of off-take. Over the past ten years photographic usage of silver has dropped from almost 7,100 tonnes to just less than 3,300 tonnes, a fall of 54%, or an annual average rate of contraction of 8.3%. Industrial applications, by contrast, have been increasing at an annual average rate of 3.1% as new uses have proliferated. 

Future performance of the Silver Price

We have stated that the silver price will outperform the gold price.   In the last month this forecast has come true with silver rising 26% with gold rising 10%.   As to the price pattern in 2009 and beyond……For Subscribers only

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter.  To subscribe, please visit www.GoldForecaster.com

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.  Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.