Silver outlook bullish for 2011 and into 2012-Thomson Reuters-GFMS
Friday, November 11, 2011 at 10:13PM
Silver Prices

 

A new Thomson Reuters-GFMS report, commissioned by The Silver Institute, forecasts silver investment will achieve yet another historically high total this year in spite of a significant level of position unwinding by institutional investors, according to an article on Mineweb.

In the report, "The Silver Investment Market-An Update, November 2011", Thomson Reuters-GFMS says the outlook for silver prices remains bullish, "with the potential of prices nearing, if not exceeding, the $40/oz, a realistic prospect as the fourth quarter develops."

"However, should silver exceed $40," the report cautioned, "some unwinding may occur, principally of institutional positions, given their focus on upside potential. This raises the possibility of some deleveraging in the future markets."

However, the study noted, "this should have little impact on silver's safe haven qualities, with the potential for retail and HNW [high-net-worth] investors to raise their asset allocation (in favor of both silver and gold."

This situation "argues well for bullion coin and small bar demand, not only in western markets, but also in India and China." Indian physical investment demand could comfortably exceed 45 million ounces this year, up from 29 million ounces last year.

"Overall, therefore, world investment demand in 2011 is expected to realize a near record high total in volume terms," the report predicted, and "in value terms likely to reach $10bn on a net basis for the first time."

The study found the principle investment vehicles for retail investors remains ETFs and physical bars and coins. Along with growing physical silver demand, investor interest in silver futures traded on future exchanges has also increased.

Nevertheless, 2011 investor activity in silver futures "has been notably volatile," according to the report.

Meanwhile, total silver ETFs holding have lost some ground. By the end of October, total holdings were reported at 577 million ounces, some 44 million ounces below the record peak of 621 million ounces established in April of this year.

The study determined the U.S. and Germany dominated the global physical investment market. "This year a fresh peak will be set, in excess of 41 Moz., which will therefore achieve a similar gain to the 20% improvement posted in 2010.

An interesting aspect of physical demand has been the market for U.S. Eagles manufactured by the U.S. Mint. Although the level of demand has fallen considerably short of the number of coins actually minted, European Eagle demand may amount to roughly 20%-30% of the total U.S. Eagles produced.

This year a fresh peak of 41 million coins is forecast for the U.S. Mint's American Eagle silver bullion coins sales, compared to last year record of 34 million coins. Globally bullion coins sales are on target for another record high, according to the study.

"This sales pattern therefore suggests that U.S. retail coin demand is somewhat lower than might have been expected (if one had assumed that Silver Eagles were consumed almost entirely in the United States)," said Thomson Reuters-GFMS.

In Canada, the market is dominated by sales of the locally produced 1oz Maple Leaf bullion coin. Sales of the coins rose by over 50% in 2010 with a further substantial increase anticipated this year.

Although China's silver demand is considered still in its infancy, concerns about inflation, together with still robust price expectations, suggest a bullish outlook for Chinese investment demand over the remainder of this year, GFMS/Thomson Reuters suggested.

In India, total silver demand is expected to exceed 45 million ounces this year, a 55% increase over 2010.

The report identified the top five silver producers as BHP Billiton, 46.6 Moz in 2010; Fresnillo, 38.6 Moz; KGHM Polska Miedz, 37.3 Moz; Pan American Silver, 24.3 Moz; and Goldcorp, 23 Moz.

"Given that only a relatively small percentage of annual world silver production is derived from primary silver producer," the report observed, "it is of little surprise to learn that the market features a modest number of primary silver companies."

Meanwhile, for investors seeking a pure play upon silver there are streaming companies such as Silver Wheaton with a market cap of $11 billion.

The study found world silver fabrication (not including coins) this year is expected to achieve its highest total since 2007. "However, this will be offset by a health rise in global mine production."

"As a result, we expect this year to generate a silver market surplus not dissimilar to the 2010 total of 190 million ounces," predicted GFMS/Thomson Reuters. "In other words, the surplus should remain at near record highs, against the far more modest levels seen in the mid-2000s."

"In value terms, the forecast surplus for 2011 is even more noteworthy, at an estimated US$7.5 billion, nearly double the positive in 2010 (which itself was a record level)," the report observed. "In spite of this hefty surplus, silver prices, in broad measure, strengthening further this year, pointing to, at times, still robust levels of investors demand, which has effectively ‘stepped in', as occurred in 2009 and 2010, to absorb this excess metal."

To download a copy of The Silver Investment Market-An Update, go to http://www.silverinstitute.org/images/stories/silver/PDF/SilverInvestUpdateNov11.pdf

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