World Silver Survey 2009 - Its Key Findings & The Update World Silver Survey 2009 was launched on 13th May at an event in New York hosted by The Silver Institute, where GFMS’ chairman, Philip Klapwijk presented a summary of the report’s key findings. That represents the 15th survey produced by GFMS for The Silver Institute. For those of you unfamiliar with the publication, the 100 page report covers all areas of silver’s supply and demand, providing a 10-year breakdown by country for all the main components. The report also contains a review of price behaviour during the year just gone. Perhaps one of the most important findings of the overall report was that total fabrication demand fell by less than 1% last year. Much of this resilience for silver was the product of the investor-led surge of over 60% in coin demand. This change lifted coins & medals for the first time in our series (which goes back to 1990) ahead of silverware demand, a sector that continued to be undermined by secular forces. Arguably, more of silver’s resilience came from industrial uses, which only fell by just over 1%. Such apparent stability, however, hides major change within the year, as the first half saw further growth while the period from September onwards saw grave weakness as the global economic slowdown hit home. The second largest area of fabrication, jewellery, also suffered at the hands of the economic crisis,but the damage was restrained by consumers trading down from gold to silver in response to strained budgets and the yellow metal’s high price. Photographic demand also fell but this was very much the product of the secular shift to digital technologies. Those expecting that trend to be bottoming might be surprised to hear that photography’s losses last year were the greatest in percentage terms and by weight since the slide began in 2000. Total demand in 2008, however, was effectively unchanged on 2007, thanks to investment more than doubling. Much was driven by western investors’ acquisitions in such fields as the exchange traded funds as they shadowed the gold market and its safe haven inflows motivated by such events as the collapse of Lehman Brothers. However, India also featured prominently in this arena as fourth quarter ‘bargain hunters’ picked up over 3,000 tonnes, underpinning the market at a precarious time. As for supply, mine production rose by 2.5% last year, with the gains coming from a diverse group of countries, including Bolivia and Russia. The main countries suffering declines were Chile, the United States and Canada. In terms of source metallurgy, increases were derived as by-product from gold and lead/zinc operations whereas the supply from primary silver mines and copper by-product fell. Net government sales also dropped, in the absence of Chinese and Indian disposals. It might surprise some, given strong prices, that scrap fell too last year. Whilst true that scrap from silverware and jewellery rose, mainly in response to the price, this was outweighed by the ongoing slide for photographic scrap, as that industry shifts to digital technologies. Looking ahead, the assessment of silver’s supply/demand balance this year has been made more complex than normal by the impact of the economic slowdown and the associated heavy destocking at all stages down the distribution chain. This has led to some producers of the initial silver bearing products, such as tips for contacts or plating salts, reporting losses of well over 50% in the opening months of the year. Quite when and how operations then begin to ‘normalise’ is a great unknown. Another dramatic swing this year has been the evaporation of the great wave of retail investment in India.

World Silver Survey – What happened in 2008 Silver prices performed strongly in 2007, with the annual average rising 16% to a 27-year high of $13.38 and with the fourth quarter rally setting the stage for the surge over $20 in March this year. Investors remained the key to price strength, particularly during the fourth quarter. This may seem contradicted by the slump in implied net investment but that, in the main, only reflected investors’ disenchantment with earlier range bound conditions. That prices did not then fall away was chiefly due to fabrication’s resilience and the fall in scrap. Total supply in 2007 fell by 19.2 Moz (597 t), to total 894.5 Moz (27,821 t). Mine production, however, registered an increase of almost 4%, to achieve 670.6 Moz (20,858 t) in 2007, due to gains in Latin America and China, and a recovery in Australian output. Net government sales fell by 46% to 42.3 Moz (1,314 t), primarily because of the conspicuous absence of China and India, although Russian releases offset their losses somewhat. Scrap supply also fell, declining by 3% to 181.6 Moz (5,649 t). This was largely attributable to falling supply from photographic materials, which have historically been the largest contributor to scrap from fabricated products. Total fabrication staged a rise of 0.9% in 2007, reaching 843.7 Moz (26,241 t). This was solely as a result of gains by the industrial segment, with last year’s total up in excess of 7% to 455.3 Moz (14,162 t). Increased industrial off take, combined with declines elsewhere, meant that its share of total demand passed 50% for the first time. All regions posted growth in this sector, with the three largest gains occurring in India, the United States and China. In contrast, all other areas of fabrication saw losses, of which almost 70% were due to the ongoing decline in photographic demand resulting from the shift to digital technology. This and other factors in other areas, such as changing western tastes in silverware and Indian concerns over metal purity, meant that the bulk of all losses were due to drivers other than the price. Jewelry demand fell, albeit by less than 2%, to an estimated 163.4 Moz (5,083 t). Producer de-hedging also served to boost demand. There was little fresh hedging by producers, and several moved into being unhedged through delivering into large positions and accelerating buy-backs. Looking ahead, the prospects for another year-on-year price gain for silver seem positive, based on: expected gains in gold prices; continued US dollar weakness; growing inflation fears; and a substantial inflow of money into the commodities sector. World Silver Supply and Demand (Moz) Supply   Mine Production 647.4 670.6 Net Government Sales   78.2 42.3 Old Silver Scrap   188.0 181.6 Producer Hedging - - Implied Net Disinvestment   - - Total Supply 913.7 894.5 Demand       Fabrication     Industrial Applications 424.8 455.3 Photography   144.0 128.3 Jewelry   166.3 163.4 Silverware   61.2 58.8 Coins & Medals   39.8 37.8 Total Fabrication   836.0 843.7 Net Government Purchases   - - Producer De-Hedging   6.8 25.0 Implied Net Investment   70.8 25.8 Total Demand   913.7 894.5 Silver Price (London US$/oz) 11.549 13.384

What pity silver is so unreliable! Gold’s price is reaching heights not seen for years, but will silver follow? Who knows! It might but now it is lagging

Silver is on the up — but how high will it go? Given its unpredictability, there is a strong temptation to look at old ‘lore’. Silver’s future for centuries was predicted by its relationship to gold. Silver’s price, according to the American Geological Institute, was traditionally around a sixteenth of gold. The reason? Gold is about 16 times rarer. However, is US$45 an ounce plausible, when the best near-term industry forecasts are for US$15?

Silver is an older store of wealth than gold, but it has been friendless for years. Silver’s problem is that it is useful. Therefore, demand/supply balance sums include estimates of how much will be bought by this or that industry. If a major buyer goes, such as the 25% market share taken by photography, there are problems. Indeed, in the last few years digital photography has taken over from the silver-halide film process.

Silver has become uncomfortably volatile, after 200 flat years to the 1970s. Then it started to recover from US25 cents an ounce. The buccaneering Texan Hunt brothers then decided to corner the market. They pushed the price up to US$52.5 in 1980.

The brothers made a fatal flaw – they forgot about the bottomless store of silver jewellery in India. It poured in to the market to chase profits. Pretty rapidly silver dropped to a few dollars an ounce. Warren Buffett also had a go. In the late ‘90s, he bought millions of ounces at US$4.40. He reckoned that supply was not catching up with demand. His action alone put 50% on the price. He sold out and has never gone back.

From 1993 to late 2003, silver ranged from US$4.00 to US$5.50 an ounce. Amazingly, the market was supposed to be in deficit — supply from mines and scrap was less than demand for jewellery and industry. Anecdotal evidence suggested it was attracting investors. So, why didn’t the price rise? The Silver Book, a study out this summer from analysts VM Group, came up with the answer -there was more silver around than people realised. Recycling from photography had been more efficient than thought. As India got richer, they upgraded to gold jewellery — selling the family silver and investors were probably not as active as the rumours suggested.

Since late 2003, silver prices have moved up. Last year was brilliant for silver. Its average price increased 58% on 2005 to US$11.61 per ounce. In addition, there was little increase in silver arriving at markets from mines, central banks or recycling. Bullish sentiment kept on going in 2007’s first half, in which the price averaged US$13.75.

The question is — where now? It comes as mining production is forecast to rise 3% this year to record levels. Fortunately, central banks are not expected to unload more from their vaults. The Reserve Bank of India, for one, is clean out. However, it does have a few million ounces confiscated from smugglers to sell.

Photography is a declining market, and there is less silver coinage, but there are other new industrial users. Small now, but they are growing. Not widely known is that silver is a biocide — good at killing bacteria. It is used in swimming pool treatments, in hospitals and spas. Other customers are those who want to keep products clean. They include motor companies who use it in the plastic for car interiors.

Silver is also a good heat conductor, and it holds antistatic and other properties. Over 24,000 silver-coated quartz tiles protected NASA's Magellan spacecraft from overheating and radiation as it orbited the earth.

Jewellery — ‘fabricating’ in the trade — is an important product for silver. However, silver’s future lies with fashion. As, consultant analysts GFMS says, designers’ edicts be they in New York, Paris, Beijing or Mumbai will be what counts.

The mining analyst believes that the return of Indian buying is critical. Also of importance are the rise of the ‘metrosexual’ male as a jewellery consumer and the popularity of expensive fashion brands.

Many key investors really seem to like silver. Some of gold’s safe haven attraction has rubbed off in these financially unstable times. Last year for the first time in ages, investors bought more silver than they sold. Investment choice is widening. More mining companies are highlighting their silver production now the price has gone up. There are exchange-traded funds, mutual funds, options, certificates, bars, even broker buying plans.

GFMS Limited – November 2007 Silver Outlook

GFMS expects Silver fabrication demand to rise by around 2% this year, with silver’s substantial price increase since early 2000 having relatively little impact on this component of demand. Mine production is forecast to rise marginally while scrap should record a small loss, despite silver’s price run up. Investment demand, has been the chief cause of the strength of the price, the white metal rising to peaks of well above US$15.50 an ounce in November 2007

The key Silver indicators are:

Supply Highlights
Mine production is forecast to increase by just over 3% this year. The outlook for 2008 is for output to rise far more strongly, possibly by greater than 6% year-on-year.

Scrap supply is expected to decline this year. This is mainly due to a reduction in the quantity of silver recovered from photographic waste as this area of demand continues to fall.

Government sales are forecast to fall sharply, possibly by as much as 50% year-on-year. This is the result of markedly lower sales from China and the absence of Indian government disposals this year.

Demand Highlights
Fabrication demand
In 2008, demand is expected to suffer from a combination of still higher prices (and high price volatility) and a marked slowdown in global GDP and industrial production growth.

Industrial demand is currently forecast to expand by over 6% in 2008. Its core component of electrical and electronics end-uses has performed particularly strongly. Nevertheless, an expected setback in industrial demand next year may be compounded by weaker construction output and a potential cyclical downturn in the electronics industry.

Jewellery & Silverware fabrication is expected to gain around 2% in 2008. Demand in most countries has been little affected by the silver price rise (indeed silver has even benefited somewhat from higher gold prices). The key exception is the pivotal Indian market, where demand has also been negatively impacted by a secular shift in investment favouring silver bullion over high-carat jewellery.

Photographic use of silver in 2007 is declining again. This year a drop of 10% looks to be on the cards. A continued switch in most areas to digital technology, coupled with an economisation in silver use in some photographic products has driven this year’s decline in demand.

Investment
In 2007, investment has again featured solidly on the demand side of the equation and has been the essential driver of the rise in the silver price to an expected annual average of around $13.40 this year, which would represent a gain of 16% on 2006’s average.

Most investors are forecast to remain firmly on the buy-side in 2008. Rising investment next year should be more than enough to offset the headwinds from higher mine production and an expected fall in fabrication demand. As a result, the average silver price is forecast to advance further in 2008 and to trade within an approximate US$13-$17 per ounce range.