Silver price may reach US$40 in 2011, says GFMS

2011-FEB-24

Roman Baudzus writes --

Yesterday, the silver price reached a new three-decade high of more than US$34 per ounce. Although the stock markets, many agricultural commodities as well as platinum and palladium suffered heavy losses at the end of yesterday's trading session, the gold and silver prices were comfortably positioned. According to many market experts the strong performance of the two precious metals will continue in the foreseeable future, since the investment demand among capital market investors is rising further.

While the mining production of silver will probably rise by 8 percent to 800 million ounces in comparison to the previous year, the demand for the white metal is expected to keep up with this development. The high demand for silver should continue to support its price development in the future, the precious metals consultancy GFMS said in a statement yesterday. A further increase by 40 to 50 percent in comparison to the average price in 2010 could become reality in 2011. Under these circumstances, the silver price could rise to between US$35 and US$40 this year; still more than 20% under its all-time high of approximately US$50, which had been reached January 18th, 1980.

The demand for silver was not only growing among capital market investors, who primarily invested in Exchange Traded Funds (ETFs). The industrial demand as well as the physical demand for silver coins and silver bars in the United States and China increased strongly during the last few months. More and more mining firms were borrowing silver for use in hedging transactions. Nevertheless, GFMS also stated that in spite of the robust demand, a surplus at the markets could be expected due to the increased mining production.

In the past few years many market participants considered silver a base metal rather than a precious metal. Due to its unique features the white metal is used in more and more industrial applications. This mainly includes the automobile, medical, high tech and solar industries. The price development of the base metals, which include copper, zinc and lead, had therefore influenced the silver performance for a long period of time. With the rising investment demand and the emission of ETF products, the situation has changed somewhat. We can now observe a much closer orientation of the silver price on gold's price development. The gold-silver ratio has clearly narrowed since last year, which makes silver the better performer in comparison to gold.

GFMS' estimates are based on a yearly demand of 885 million ounces in 2011, which would correspond to a18% rise, or 135 million ounces, since 2009. The demand would increase by 18% or 90 million ounces in the same period. Although the silver surplus will be reduced, GFMS do not expect supply bottlenecks.