Friday, April 15, 2011

Everybody's Talking About Silver - Apr 15th

Everybody’s Talking About Silver, and That’s The Problem
April 15th, 2011

It seems that silver makes a new multi-decade high everyday, and whenever I ‘talk commodities’ with someone new, invariably the question is asked, “What is going on with the silver market, and is it too late to get in?”  Despite the incredible returns that a long silver position would have yielded over the past year (prices are up a whopping 162% over the past 12 months), my typical response has been that it is investment demand pushing it up, and the volatility is so great that I simply cannot participate, preferring the more subdued gold market to fulfill my precious metals appetite.  That said, I feel compelled to take a closer look at the fundamentals of the silver market this morning, and would like to start off by thanking GMFS for its World Silver Survey released last week.

Production and Other Supply

There is certainly no shortage of silver supply; in fact 1,056.8 million ounces hit the market in 2010, up 14.6 percent from the year earlier.  Of that, around 70 percent came from mines - in other words, new silver.  The next largest source was from scrap, representing around 20 percent, which increase 14 percent in 2010 to a record of 215 million ounces.  The most notable source of silver supply came from producer hedging.  After 4 years of de-hedging that left the global hedge book at a 2 decade low, producers were quick to take advantage of rising prices by forward selling 61.1 million ounces of silver, mostly in the fourth quarter of last year.  Precious metals hedging had fallen out of favour among mine operators in recent years, as prices have been steadily appreciating.  The re-emergence of this activity may indicate that commercial producers view these prices as unsustainably high, or at least high enough to satisfy their needs.  Lastly, Russia sold around 40 million ounces from its stockpiles, the only significant sale from a government source.

Fabrication Demand

After suffering a big hit in 2009 following the global economic contraction, fabrication demand rebounded significantly in 2010, rising to 487.4 million ounces and is now just shy of pre-crisis levels.  Photography, once one of the main drivers of demand for the metal, has shifted largely towards digital technology, and at the same time reduced the use of silver for film by 66 percent since 2001.  Declining demand from the photography sector is often used to paint a bearish picture of the fabrication demand for silver, but in reality over the same timeframe demand from industrial applications has picked up nearly all of the slack.  One of the fastest growing segments of the industrial sector, which makes up 55 percent of fabrication demand, is the construction of photovoltaic solar panels.  Given the increasing focus of ‘green’ energy, it is probably safe to assume this will continue to consume greater quantities of silver in years to come.  All told the demand from industrial applications increased by about 80 million ounces in 2010.  The other area that experienced growth was the coin and medal sector, which consumed an additional 20 million ounces last year.

Investment Demand

Total investment demand exploded to the upside last year, estimated at around 180 million ounces.  Bullion stocks around the world continue to swell, driven largely by the holding of the major physically backed silver ETFs.  It seems clear that more than any other factor, investor demand to hold precious metals is pushing this market higher, and this could continue for some time.  Don’t be fooled however, into thinking that there isn’t enough silver to go around, as this is simply not true.  Last year was the third year in a row where the market was in a surplus, and that could easily continue into this year.  Tread carefully.

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

1 comment:

  1. You mean, no shortage of paper silver!