Silver price boost from industrial demand

Reuters | Tue, 01 Sep 2009 14:02

[miningmx.com] -- Prospects for global economic recovery may increase the call for silver from industrial users, leaving the metal ripe for fresh gains on top of already firm investment interest.

Interest from industrial consumers, which accounted for more than half of silver demand last year, could lead to the metal outperforming gold this year -- but only if confidence in the economy continues to grow, analysts said.

"Silver has really taken its lead from gold this year," said Standard Bank analyst Walter de Wet. "But now, with industrial production picking up, you have to favour silver, relative to gold at least -- as long as industrial demand keeps growing."

The metal's relationship with base metals, which, like silver, are widely used in industry, has grown in recent weeks after a spate of stronger-than-expected economic data.

Silver's correlation with copper, widely seen as the bellwether of the base metals complex, rose from just 0.1 in the first quarter to nearly 0.74 in July, Reuters data showed, as optimism over possible economic recovery grew.

Silver prices have climbed 3 percent so far in August, while gold prices have are little changed. Copper, in contrast, has climbed 10 percent.

"Investment demand is the main driver of silver, but it is also benefiting from the positive industrial outlook and the rally in the base metals," said VM group analyst Matthew Turner.

"If you look at all the commodities, base metals have left most of them behind this year in price terms, even energy," he said. "There has been so much industrial metal demand that silver is riding on the coat tails of that."

STORE OF VALUE

Silver, which like gold can be used by investors as a solid store of value, tracked moves in the yellow metal faithfully early this year.

According to Reuters data, the two metals' daily correlation was 0.8 in the first quarter -- 1 represents a full positive correlation -- as rising risk aversion sparked heavy buying of products like physically backed exchange-traded funds.

The largest silver ETF, the iShares Silver Trust, saw record inflows in the first three months of the year. But these have not been sustained. The trust's holdings rose by only 103 tonnes in July, versus more than 660 tonnes in January.

But while investment demand for silver has calmed after heavy buying earlier in the year, the metal has taken support from the belief that industrial buyers may benefit from an improved economic outlook.

Japan's economy returned to growth in the second quarter, pulling out of its longest recession since World War Two. France and Germany also resumed expansion in the quarter, ending their recessions earlier than expected.

More pertinently for silver, last week saw the release of upbeat statements from manufacturers of electronic goods -- the main industrial users of the metal.

Intel Corp, the world's leading chipmaker, raised its outlook for third-quarter revenue on stronger than expected demand for its microprocessors, while Dell Inc, the second largest PC maker, reported consensus-beating second quarter results.

"A recovery in these sectors could boost industrial demand for silver significantly," said HSBC analyst James Steel.

Silver is also used in the production of mirrors, batteries and catalysts.

LESS LIQUID

Silver is a much less liquid asset than gold, so price moves typically outperform those of gold in a rising market, and underperform them when prices fall.

A climb in industrial usage could give a useful extra fillip to silver. But metals analysts advise caution on the current rally, amid fears a more than doubling of copper prices and a 25 percent rise in aluminium prices this year may be overdone.

Such caution could temper enthusiasm for silver.

The gold/silver ratio, measuring how many ounces of silver it takes to buy one ounce of gold, is currently around 64.5, up slightly from around 63 in mid-August when silver hit a two-month high but well off the 72 level reached a month before.

Suki Cooper, an analyst at Barclays Capital, said silver's ability to depress its ratio to gold further will largely be dependent on a rise in industrial buying.

"With silver, we really need to see more industrial demand coming out," she said.