Like gold, the nominal value of silver has a long and colorful history. Silver has been coined to produce currency since 700 BC and continues to be the basic unit of monetary value for many nations around the world today. In fact, the words for “silver” and “money” are the same in at least 14 different languages. As an investment, silver remains one of our favorite vehicles for wealth accumulation. We believe that the silver investing outlook remains extremely bullish and could outperform gold over the next few years.
2007 Silver Market Review
When it’s all said and done, mine production is expected to increase 3.6% this year to ~23 million ounces. This growth n production is mainly the result of:
- increased silver output at La Coipa mine (Kinross Gold, 50% – GoldCorp, 50%);
- initial production at the San Cristobal mine (Apex Silver, 65% – Sumitomo, 35%);
- a partial rebound at BHP Billiton’s Cannington mine, the world’s largest and lowest cost silver and lead mine; and
- new production from Mexican mines including Pan American Silver’s Alamo Dorado mine and Metallica Resource’s Cerro San Pedro mine.
These increases will, however, be partially offset by production declines in Canada, Peru, Russia, and Kazakhstan.
Other market supplies this year came from producer hedging, scrap recycling, and central bank sales. But these have made only a modest overall contribution to total silver supplies.
Industrial demand is anticipated to increase over 5% by year-end while jewelry and silverware fabrication are estimated to fall slightly. Lower jewelry production in Italy, Mexico, and the United States contrasts noteworthy gains in India and China this year.
Photographic silver use is also expected to drop by 10% in 2007. Demand for photographic silver continues to be affected by the overwhelming switch to digital technology. Silver use in consumer film has again been the hardest hit sub-sector and appears to be a terminally ill market. Coin minting also looks to have dropped a little in 2007 from the level recorded last year.
Silver investment demand is likely to remain positive despite being lower than in 2006. After good buy-side interest early this year, investment demand had slumped until recently, with a bit of selling from the more speculative short-term investors. Speculators were faced with disappointment after silver failed to sustain its break through $15 an ounce and recorded a subsequent setback in prices.
During 4Q 2007, silver investment demand rebounded partially in response to the run-up in gold prices. Gold has enjoyed a overly healthy market since the end of summer due to problems with fixed income and sub-prime debt markets which led to a much lower US dollar.
Overall, the January-October period saw a ~23 million ounce rise in ETF holdings but a decline in investors’ net long futures positions. Investors’ bullion stocks, on the other hand, will have increased this year on a net basis.
For the first ten months of 2007, the average silver price was $13.16 an ounce, up 17% year-on-year and 10% on an intra-year basis. Take a look at the 1-year silver price chart below…
Although speculators have driven silver prices higher in 2007, the move has been underpinned by the resilience of fabrication demand and its short-run price insensitivity plus the absence of overall supply growth.
Silver Investing Outlook for 2008 and Beyond
Investment demand will remain key to silver’s price in 2008. Higher demand will be required from investors because silver’s supply/demand fundamentals are expected to deteriorate, with an expected surge in mine production and lower fabrication demand.
The outlook for 2008 is for a 7% rise in global mine production, most of the gain coming from:
- a full year of output at the San Cristobal mine (Apex Silver, 65% – Sumitomo, 35%);
- the commencement of production at EcuaGold Resources’ San Bartolome property in Bolivia;
- anticipated start-up at the GoldCorp’s Mexican Penasquito mine property; and
- the beginning of operations at Minefiders’ Dolores projects in Mexico.
We expect that this new production will, however, be offset by fresh silver investment demand in part through ETFs and physical bullion which will push prices significantly higher in 2008.
In the longer-term we expect silver to outperform gold. Since 2004 the gold/silver price ratio has been tightening and now sits below the ~40 year average of 54:1. Based on today’s market prices however, the gold/silver price ratio is 55:1. Take a look at the average gold/silver price ratio since 1970…
With increasing interests in ETFs and higher availability of physical silver bullion we expect this price ratio to continuing tightening over the next few years leading to an outperformance of silver prices to gold.
Greg McCoach and Luke Burgess