Investment, Industrial Demand Surge In 2010

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(Kitco News) - The sharp jump in silver prices during 2010 was the result of big increases in both investment and industrial-fabrication demand, according to the World Silver Survey 2011 released by the Silver Institute Thursday.

Global silver investment rose by 40% last year to 279.3 million troy ounces, said the report, for which data was compiled by the consultancy GFMS. This resulted in a net flow into silver of $5.6 billion, almost double the amount from 2009.

Meanwhile, total fabrication demand rose 12.8% to a 10-year high of 878.8 million ounces in 2010, led by industrial uses, said the report.

“The strength of these two areas of demand is clearly illustrated in their ability to brush aside a quite marked increase in supply,” said the report.

Silver posted an average price of $20.19 per ounce in 2010, a level surpassed only in 1980 and well up from the $14.67 average of 2009, said the report. The strength has continued so far into 2011, with the London silver fixing price averaging $31.86 through the end of the first quarter.

In the Silver Survey, GFMS described itself as “positive” on the outlook for silver prices, but “cautiously so.” The consultancy said the economic backdrop for investment remains supportive since monetary policy is unlikely to be tightened “that much” in 2011 and inflation and sovereign-debt concerns will grow. This will encourage investment demand for silver and gold alike, and ongoing gains in industrial demand should be “solid,” GFMS said.

“We are, however, somewhat concerned by the extent to which the white metal has lately powered ahead of gold,” GFMS said. “We are skeptical, for instance, that there is a ‘new paradigm’ at work that justifies a move even lower in the gold:silver ratio. Moreover, we are conscious of the fact that a fair proportion of the recent investment in silver is from more speculative money that could exit the market rapidly if conditions were to change.”

As a result, GFMS said, “we would be wary of any signs that industrial demand is faltering, as this could be a trigger for a major short-term correction in silver prices that would probably bring silver’s path more into line with that of gold.”

In an interview with Kitco News, GFMS Executive Chairman Philip Klapwijk said he looks for a wide range in silver yet this year from marginally below $30 an ounce to marginally above $50. “It’s really dependent upon the investment flow being sustained or growing, or whether that investment flow for whatever reason diminishes,” he said.

ETF, Retail Investment Climb During 2010

The report said much of the silver-investment demand last year came via exchange-traded funds, which trade like a stock but track the price of the commodity. Metal is put into storage to back ETF shares, creating physical demand.

Global ETF holdings hit 582.6 million ounces last year, an increase of 114.9 million from 2009, said the Silver Survey. The iShares Silver Trust accounted for almost 40% of the increase, with notable gains also achieved by Zurcher Kantonalbank, ETF Securities and Sprott Physical Silver Trust.

There was also a jump in retail investment demand during 2010. Physical bullion bars accounted for 55.6 million ounces of new investment last year. Meanwhile, coins and medals fabrication rose 28% to a record of 101.3 million ounces.

In the U.S., over 34.6 million U.S. Silver Eagle coins were minted, well above the previous record of almost 29 million in 2009. Additionally, the Australian Kookaburra, Austrian Philharmoniker and Canadian Maple Leaf all posted record highs in 2010.

“Implied” net silver investment (which does not include coins) recorded an all-time high last year of 178 million ounces, an increase of 47% and the highest level in GFMS’s 21-year data series. Much of this was due to ETFs, the over-the-counter market and investment in physical bars.

Klapwijk said silver “clearly benefited from investors looking for hard assets which they perceived to be safe havens against the potential for higher inflation in the future.” Furthermore, investors have turned to silver due to currency weakness in general and a lack of trust in major currencies, Klapwijk said.

“Also, the fact that interest rates are low makes putting money on deposit not particularly attractive, and the ‘cost of carry’ of having positions in precious metals is pretty trivial,” he said.

Industrial Demand Climbs 20.7%, Nearly Back To 2007-2008 Levels

Industrial demand accounted for much of the 12.8% rise in total fabrication demand during 2010, the report said. Silver’s use in industrial applications alone grew by 20.7% to 487.4 million ounces. This brought industrial demand nearly back to the levels of 491.1 million in 2007 and 492.7 million in 2008, before it slumped to 403.8 million in 2009 during the global economic slowdown in many Western nations.

“There is restocking and replenishment after the declines suffered in 2009,” Klapwijk said. “There was an element of inventory rebuild going on in the industrial space. Not only that, there was a more sustainable pick-up in industrial production and demand for products that contain silver in one form or another.”

Further, there are secular trends already occurring that means more use of silver in certain applications, including photovoltaic technology (such as solar cells) and electronics, Klapwijk said.

The strong industrial demand continued into the first quarter of this year. Assuming the economy does not tank, GFMS sees this hitting a record in 2011. “I wouldn’t be too surprised if we get above 500 million ounces in industrial demand this year,” Klapwijk said.

Jewelry demand rose 5.1% to 167 million ounces, which the Silver Survey said was the first substantial rise since 2003. This was tied to strong economic growth in emerging-market nations and the improving economic picture in the industrialized world.

The use of silver in photography fell by 6.6 million ounces, which was the smallest loss in nine years as medical centers deferred conversion to digital systems, said the report. Silverware demand fell to 50.3 million ounces from 58.2 million ounces in 2009, mainly due to lower demand in India.

By Allen Sykora of Kitco News; asykora@kitco.com