Silver is forecast to pass the $20/oz level in the short term based on a continued surge in investment. A recovery in fabrication demand should support prices in 2010 even as investor interest eventually moderates. A small increase in mine production in 2009 will be offset by lower supply from scrap and government sales. Fabrication demand is projected to fall by almost 11% this year, as a slide in industrial uses and ongoing losses in photography are only partly compensated by robust growth in coins and a modest rise in jewellery and silverware fabrication.
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 annual average in 2009 is currently expected by GFMS to record $14.78/oz, 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.
These predictions were presented yesterday evening at the annual New York Silver Dinner organised by The Silver Institute by GFMS in its interim silver market review. This review included GFMS’ provisional supply and demand forecasts for 2009 and the consultancy’s expectations for silver supply, demand and the price in 2010. The key points from the interim silver market review are as follows.
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.
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 and 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 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 substantially this year on a net basis.
For the first ten months of 2009, the silver price, basis the London fixing, averaged $14.06, down 12% year-on-year for the January-October period but up 50% on an intra-year basis.
Investment demand remains the main driver of the price and, in GFMS’ view, this has raised silver to well above the equilibrium level that would likely prevail in the absence of such investment.
Silver’s supply/demand fundamentals (excluding investment) should become more supportive in 2010, largely due to a recovery in fabrication demand. Taken in isolation this will be positive for the price. Nevertheless, a shrinking “surplus” between supply from mine production and scrap and fabrication demand means that less metal will have to be absorbed by investors, who GFMS forecast under their Base Case scenario may be somewhat less motivated next year to purchase silver as the economy gradually recovers, short term interest rates rise and the US dollar stabilises.