World Silver Survey forecasts double-digit silver prices will continue

The World Silver Survey 2007, released today by the Silver Institute, forecasts that the current fundamental/supply demand picture for silver is "at least supportive of prices well into double-digits," in the absence of a major externally-driven setback to industrial demand.

The authors of the survey - London-based metals consultant GFMS - suggested that "for silver to break out to the upside or downside would therefore seem to require intervention from investors." A downside could occur if a slide in global GDP growth prompted investors to liquidate their positions.

Nevertheless, GFMS's research revealed that, "at the present time, investors still look set to expand their investment in commodities."

The average silver price averaged US$11.55 in 2006, an increase of 58%, and a 26-year high, according to the survey. "Equally remarkable is that the price has been sustained at such high levels since the ETF-driven peak of close to $15 was reached in May 2006."

GFMS noted that the year-on-year rise in silver prices was also strong compared to gold, which rose 36% and platinum, which increased 27%. Investment was the prime driver behind the overall gains with the launch of the silver ETF on April 28, 2006.

"The relatively illiquid nature of silver no doubt contributed to its gains being greater than gold's," the survey asserted, "but the yellow metal's differing response to a bull market ...must also have been significant."

Silver's price volatility almost doubled to 45% in 2006. The trading range also jumped to 53%. Price volatility was greater in the second quarter of last year at 69% whereas the least volatile quarter was the fourth-which was believed to have seen stronger buying in the physical markets--at just under 28%, according to the survey.

"Besides its own appeal, silver has also benefited from commodities in general being in vogue and, in particular, its traditional strong relationship with gold, which of course has also enjoyed a powerful investor-led rally."

"Looking ahead, GFMS expect that the future of the yellow metal will remain of paramount importance to the silver price, particularly as such an exogenous shock that would boost silver more than gold, such as the launch of the first silver ETF, is unlikely to appear in the near future."

INDUSTRIAL DEMAND

At the same time, industrial demand for silver resulted in a fifth consecutive year of growth. Last year represented a record for the United States with respect to total industrial silver use, posting a 6% increase to 106.8 million ounces, "illustrating how this area of demand has little short-term price sensitivity and is driven instead by external factors such as technology and the level of industrial production."

Total industrial demand exceeded 50% of total fabrication demand for the first time in 2006. "Looking ahead, demand is likely to remain relatively untroubled by prices with a $11-$14 range," GFMS predicted. However, GFMS also warned that with the hefty percentage of industrial silver use comprising overall fabrication demand, "silver is vulnerable to any major setback in global industrial production."

"In 2007, jewelry and silverware demand ought to remain fairly robust unless prices reach new highs," according to the survey. "Photographic demand will fall further in 2007, but the drop in volume, as opposed to in percentage terms, should moderate."

GFMS found that silver jewelry is winning the youth vote as younger consumers view yellow gold as dated or flashy. Silver jewelry sales are also drifting toward well known brands.

Jewelry fabrication demand posted a 5% fall to 165.8 million ounces in 2006, largely due to higher prices which generated a 28% slump in India. However, China and Indonesia reported respective fabrication gains of 16% and 18%.

Lower fabrication in prices sensitive countries and structural taste shifts account for the 7.5 million ounce dip (11%) in global silverware demand to 59.1 million ounces in 2006. About 60% of the silverware decline was due to India. However, Russia has bucked the global trend as the demand for silverware has increased dramatically in recent years, according to the survey.

Meanwhile, global silver coin fabrication sank to below 40 million ounces for the first time in three years.

The largest segment of industrial demand, electrical and electronics fabrication, benefited from higher sales into consumer electronics, the automobile sector, and the photo voltaic industry, which achieved notably higher growth. "It will be industrial applications that will ensure the sector continues to grow in the future when metal prices retreat, and investors move away to other market opportunities," GFMS declared.

MINE PRODUCTION

Global silver mine production reached 646.1 million ounces in 2006 with notable gains in Peru, Mexico and China. However, a 28% drop in Australian output took its toll, as production declined 21.7 million ounces chiefly due to events at BHP Billiton's Cannington mine in Queensland, formerly the world's largest silver operation.

The decline of the ore grade at the Eskay Creek gold mine in Canada, which is planned for closure nest year, accounted for a significant portion of Canada's overall silver production losses.

More than 70% of silver output is as a by-product of other metal mining. Silver generated at primary mines declined 10% to 161.4 million ounces, representing 25% of global silver production. Cash costs at primary silver mines decline by 16% to average $2.74/oz.

Pan American's Morococha mine in Peru took the title of the lowest cost silver mine with full year cash costs reported at a negative $3.71/oz (after byproduct credits were taken into account), a $6/oz year-on-year reduction.

The top five silver producing nations in 2006, respectively, were Peru, Mexico, China, Australia, and Chile. The top five silver producing companies were Mexico's Industrias Peñoles at 46.9 million ounces, Poland's KGHM Polska Miedź (a copper company) at 39.9 million ounces, Australia's BHP Billiton, 37 million ounces, Kazakhstan's Kazakhmys, 21.5 million and Russia's Polymetal, 17.3 million ounces.

GFMS forecasts an uninterrupted global mine supply increase through 2008, with a 3% rise in 2007. The survey predicts that Australian silver production will recover, while fresh mine supply in South America and Mexico will come on line.

Interestingly, GFMS expressed its confidence that both Apex Silver's San Cristobal project and Coeur d'Alene's San Bartolome will receive final approvals from the Bolivian government.

FINANCIALS

Silver from above-ground stocks on a net basis dropped by 4% in 2006 to 194.4 million ounces as a result of a shift of net producer hedging to the demand side. GFMS estimated that mine production account for 77% of total supply over 2006. "It is finally interesting to note that, although in respect to confidentiality GFMS cannot disclose a breakdown between allocated and unallocated stocks, there was a clear shift from the latter and into the former over the course of the year"

Net government sales increased by 18% to 77.7 million ounces in 2006 as a result of marked increases in Russian sales, coupled with ongoing sales from Indian government silver stocks. "The lift in government sales was more than offset by producers collectively abstaining from hedging, in spite of the very high forward prices available at times last year." Government stocks of silver are estimated to have fallen by nearly 77.7 million ounces last year to reach 137.2 million ounces by year-end, according to GFMS.

The delta-adjusted silver hedge book at year-end 2006 was reported at 82 million ounces, an 8% decline from the year-end 2005 position. "At first glance, it was perhaps surprising that the 58% rise in the average spot price did not do more to stimulate fresh hedging," GFMS noted. "Part of the explanation was a continued shift in hedging practices, which has seen a number of producers lock in silver prices using silver purchase agreements rather than the forward market."

Noteworthy fresh hedges in 2006 included the conclusion of Bema Gold's project related hedge at Kupol in Russia; an increase in the volume of purchased puts at KGHM Polska Miedź; and Boliden's extension of its hedge program connected with the expansion at Aitik, one of Europe's largest copper mines.

Implied net investment was down 17% to 64.5 million ounces last year.

Due to a lack of publicly-available data on activity in silver OTC products, GFMS was unable to provide a meaningful estimate of the impact of OTC activity on the physical market.

To obtain a copy of "World Silver Survey 2007," go to the Silver Institute's website at http://www.silverinstitute.org/