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Silver price growth hinges on investment
Allan Seccombe
Posted: Thu, 17 Aug 2006

[miningmx.com] -- SILVER prices are likely to rise or at least remain buoyant in 2006 because of increased investment overriding what the supply and demand fundamentals in the sector would dictate, The World Silver Survey 2006 shows.

The silver price has more than tripled over the past 30 months, despite increased mine supply and a modest growth in fabrication, largely because of renewed investor interest, GFMS Ltd said in the survey produced for The Silver Institute and funded by 21 companies and organisations.

“On balance, its seems as if further growth in investment could drive prices higher or, at least, maintain them at levels well above what might be expected given the interplay of silver’s other supply/demand components,” the Survey reported.

The performance of the new silver-backed exchange-traded fund (ETF) will play a hefty role in determining the metal's price direction after the price was pushed to 23-year highs on anticipation of the launch of the ETF in April.
growth in investment could drive prices higher
"At present, the outlook seem positive, with good initial demand reported," the 12 Silver Survey said.

"However, assuming the ETF is successful in attracting investors, at some point the related build up of substantial near-market bullion stock could start to represent an "overhang", although this threat might only be realised after silver prices have ratched up still further," it said.

Increased silver production from mines is expected from 2007 onwards, putting pressure on refineries. However, mine output is seen slowing in 2006 to a gain of one percent or 6.4m oz after mine supply increased by a widely anticipated three percent year-on-year in 2005 to 641.6m oz.

Lower output at established mines will offset new mine production in 2006, the Survey reported.

Freeport’s Grasberg, BHP Billiton’s Cannington, Barrick’s Eskay Creek and Polymetal’s Lunnoye are expected to produce less silver this year.

In 2007, a host of new mines will come on stream, including Pan America’s Alamo Dorado, Couer d’Alene’s San Bartoleme and Minefinder’s Dolores.

The Survey reckons mined silver increased by 150m oz and scrap recycling by 30m oz in the past decade, while a number of silver refineries have closed. Many silver refineries now form are of base metals operations.

“As average utilisation levels have improved, the availability of spare capacity in silver refining has not only declined, but has arguably become less flexible,” the Survey said.

Mine production will rise up to 2008 and from 2009 there is the prospect of up to 30m oz/year of byproduct silver from Barrick’s Pascua Lama gold project in Chile/Argentina, the Survey pointed out.

“In this environment, it will be of increasing strategic importance for mining companies to secure long-term access to appropriate silver refining capacity both for existing and envisioned production.

“At the same time, the world’s major silver refiners will be faced with investment decisions over capacity expansions and process flexibility together with questions concerning the longer-term evolution of mine production and recycling volumes in years ahead,” the Survey said.
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Scrap supply rose three percent in 2005 to 187.3m oz despite higher prices because of the price inelasticity in a big portion of scrap recovery.

Industrial fabrication rose 11% to a record 409.3m oz in 2005, fuelling a three percent increase in total silver use in fabrication to its highest level since 2001 of 864.4m oz.

Investment demand in silver has been rising since 2004, becoming a dominant influence on the price, with speculative interest pushing silver to levels not seen since 1983.

Silver was largely range-bound in 2005, but took off in the last quarter of the year when investors took a cue from the rising gold price, some direction from soaring base metals prices and overall fund inflows into commodities baskets.

In early 2006, prices ran hard ahead of the launch of a silver-backed exchange-traded fund, rising above $14/oz. The silver price was bid at $11.99 at 17:55 GMT.

However, mainstream investment from pension funds for example remains elusive.

“Silver’s investor base remains fairly narrow and a broadening of it would seem necessary if the metal is to move still higher or even consolidate its gains over 2006-to-date,” the survey said.