By Jon A. Nones
29 Apr 2008 at 05:00 PM GMT-04:00
SEATTLE (ResourceInvestor.com) -- From January to March, silver prices surged 40% to hit a 27-year high of $21.44 on March 17, more than doubling gold’s return during that time. This followed gains of about 15% in 2007. Although silver prices have fallen back to below $17, CPM Group maintains that investor buying will continue to support prices in 2008.
“Thus far in 2008 political, economic and financial uncertainties have continued to lead investors to buy silver,” said the New York-based commodities consultancy and research firm. “Higher prices are expected later in 2008 and early 2009.”
In its 185-page 2008 Silver Yearbook released on Tuesday, CPM Group forecasts that net investor buying will keep silver prices strong this year, but expects a period of price weakness during the second and third quarters as other commodity prices ease. The sell-off in silver in the middle of March has carried over in April with seasonally week months approaching.
According to CPM Group, the March sell-off was part of a wide sell-off in commodities by shorter term traders and speculative oriented investors. Many banks and brokerages had taken short-term long positions and were taking profits out of those positions.
Even still, CPM noted that investors are buying silver for all the same reasons they are buying gold: As a safe haven during times of financial distress, as an inflationary hedge and as a hedge against a falling dollar. And this will continue so long as economic and financial problems remain in the U.S. and abroad.
The Deutsche Bank reported its first loss in five years today, as it wrote down over $4 billion in bad investments. Likewise, JP Morgan reported write downs of $2.6 billion on its loan portfolio in the first quarter. Last quarter, Citigroup, Bear Stearns, Goldman Sachs and Lehman already reported massive write downs largely tied to subprime mortgage losses.
In the meantime, the dollar has only recently started to rebound from record lows versus the euro. In mid-April, the 15-nation currency was trading very close to $1.60. Today, the dollar rose 0.6% to $1.5566 per euro in New York, from $1.5657 yesterday. The U.S. Dollar Index was last up 0.338 at 72.842.
Helping to support the dollar is the expectation that the Fed will cut rates again on Wednesday, dropping the federal funds rate by a quarter percentage point to 2%. The Fed has aggressively cut rates from 5.25% since September 2007 in an attempt to stimulate the slowing economy despite growing inflationary concerns - and these concerns are what drive investors to gold and silver.
On a net basis, investors are estimated to have purchased 60.8 million silver ounces last year, slightly lower than the 65.5 million ounces they are estimated to have purchased in 2006, according to CPM Group. This year is projected to see a third consecutive year of net buying by investors, with investors buying a projected 74.9 million ounces.
Barclays iShares Silver Trust [AMEX:SLV] now holds more than 5,770 tonnes of silver, a rise of about 10% since the end of last year. SLV gained 21.74% in Q1, 34.09% in the last 12 months and 46.24% since its inception in April 2006.
Last week from Monday through Thursday, when gold lost nearly $50 and silver gave up $1.50, streetTRACKS Gold Trust [NYSE:GLD] reduced its metal holdings by a little over 50 tonnes from 641.82 to 591.19 tonnes. There was no corresponding reduction of metal holdings by iShares Silver Trust.
Overseas, however, ETF Securities' London-listed ETFS Physical Silver ETF [LSE:PHAG] has lost about 50 tonnes since the start of the year, now with just about 300 tonnes in trust. Stephen Briggs, analyst at Paris-based Societe Generale, was recently quoted by Reuters forecasting that silver ETF demand will fall as more supply comes on stream.
“Silver is very dependent on one source of demand - ETFs. You can't get excited about silver in the same way as gold. Silver doesn't really have the same cachet,” he said.
Jason Hommel, editor of Silver Stock Report, rebutted these statements in a recent commentary, asking why demand from silver ETFs would fall when fundamentals point to the contrary.
“Silver prices will go up even without new investor demand, due to the overwhelming fundamentals that there is so little investment demand at all,” said Hommel. “Silver has absolutely no cachet.”
He said about 160% of gold mine supply is purchased by investors each year - about 4,000 tonnes of gold. In stark contrast, only about 0.07% of silver mine supply is purchased by investors each year - about 1,555 tonnes.
“With industry consuming more silver than is mined each year, any slight increase in investor demand for silver will continue to drive silver's prices upwards, and make a mockery of all of wall street and all they do and all they have to offer,” concluded Hommel.
According to CPM Group, total silver supply reached 784.8 million ounces last year, an increase of 0.2% from the previous year. Supply from mine production last year totalled 533.7 million ounces, an increase of 4.1% from 2006, while secondary supply declined slightly to 243.1 million ounces, down 0.6% from 2006 levels.
In 2008, total supply is projected to increase 3.9% to 815.1 million ounces, while mine production could rise 4.4% to reach 557.4 million ounces. Secondary supply meanwhile could rise to 257.7 million ounces, an increase of 6.0% from last year.
On the other side, fabrication demand increased 0.9% to 724 million ounces in 2007. Demand for silver use in jewellery, silverware, electronics and batteries all increased, while silver use in photography continued to decline, totalling 169.5 million ounces last year.
“This decline was not as steep as it had been over the past couple of years, however, reflecting continued use of standard film especially in one-shot cameras by vacationers and in emerging economies,” CPM Group said.
In 2008, CPM Group forecasts that fabrication demand will rise a modest 2.2% to 740.2 million ounces. Demand in most sectors is projected to increase, with the exception of silver use in photography, which could decline to 159.8 million ounces this year.
Spot silver was last quoted at $16.54, down from $16.99 in New York on Monday. July silver futures dropped 48 cents to close at $16.64 an ounce on the New York Mercantile Exchange.