An unexpected surge in investor demand is sending silver prices soaring—and speculators and mining companies are digging in.
In the past four months, the metal has upended forecasts, rising 51% to a series of 30-year highs, before inflation. Silver closed Thursday at $29.31 a troy ounce, up from $16.822 at the beginning of 2010.
Among the four major precious metals—the others being gold, platinum and palladium—silver is up 74% this year, on track to be the second-best performing commodity after palladium, which is up 86%. Gold, by contrast, is up 26% and copper just under 28%.
Prices are rising despite oversupply and a lackluster recovery in industrial demand. Many analysts expected those factors would keep a lid on prices in 2010. What they didn’t expect was an overwhelming flow of money into the market from investors eager to ride a commodities rally.
“This is a story almost entirely about investment,” says Stephen Briggs, senior metals strategist at BNP Paribas.
The global silver appetite partly reflects world economic improvements. Investors from the U.S. to China turned to “hard” assets such as copper and other commodities in part as a hedge against inflation worries. Silver benefits from a dual role as industrial commodity and precious metal.
Even if prices retreat to $15 an ounce—a level seen as recently as early this year—some prospectors say they can break even, which means development will continue. “I think we are starting a new era in mining here,” says Greg Stewart, president of United Mining Group, which has an 80% interest in the Crescent Silver Mine.
Exchange-traded funds backed with silver have enabled investors to invest in a market that traditionally was harder to participate in. The largest silver ETF, the $10.2 billion iShares Silver Trust, has seen a $1.1 billion net inflow for the first 11 months of this year. In recent months, concerns about inflation, the European debt crisis and the U.S. Federal Reserve’s recent moves to boost the economy have driven investors to hard assets, also benefitting silver prices.
The craze has reached the coin market. In November, silver American Eagle coins sold by the U.S. Mint amounted to 4.26 million ounces, a monthly record in the agency’s history.
Silver’s reliance on investors to prop up the price could cause it to tumble suddenly. “When investor support for the metal fades, the downside is going to be pretty substantial,” says Credit Suisse analyst Tom Kendall. He forecasts an average price of $30.10 per troy ounce next year as “a lot of factors that have led people to buy silver would still be there in 2011.” But he cautions, “The number is only going to be achievable as long as fresh money keeps moving in.”
Silver’s all-time high was set in January 1980 at $48.70 an ounce, or $129.32 when adjusted for inflation.
This year investors are expected to pile a record $4.5 billion into the silver market, accounting for 24% of the world’s total demand, says GFMS Ltd., a metals consulting firm in London. That’s the highest level, in dollar terms, in decades. Silver’s relatively small market size—$19 billion compared with $170 billion for gold—has also played a role in amplifying the impact of investors, according to GFMS.
The strength in silver prices has prompted a flurry of development around the globe and pushed anticipated production in 2010 to 733.2 million ounces, up 3.3% from 2009 levels, and up 14% since 2006.
Silver has some inherent appeal due to its industrial use in electronics, silverware and coins. And reserves are limited. According to the U.S. Geological Survey, there are fewer years of U.S. silver production left in the ground than any other precious metal including gold.
Overall, silver production has been rising steadily in the past five years, with most of the growth coming from mines in Mexico, Latin America and Australia. Goldcorp., a Vancouver-based mining company, expects to more than triple output at its mine in Mexico, Penasquito, which is expected to produce 10 million ounces of silver in 2011, up from about 3 million ounces in 2009, according to GFMS.
Another new mine, Coeur d’Alene Mines Corporation’s Palmarejo silver and gold mine in Mexico, is also ramping up to produce 9 million ounces annually. And BHP Billiton, which owns one of the largest silver mines in the world, Cannington, is looking to increase production and extend the life of the mine, located in Australia.
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source: The Wall Street Journal Online