Commodities | Jun 07 2007
By Chris Shaw
A week or so ago market commentator Dennis Gartman of “The Gartman Report” advised clients to buy silver, suggesting the indicators were positive for the metal to enjoy solid gains.
So far he and his clients have been rewarded by a small gain in price and he retains his positive view by preparing to add to his position if silver trades above US$13.80 per ounce. Similarly positive on the metal are analysts at RBC Capital Markets, though more on a medium-term basis as the broker sees potential for some seasonal weakness in coming months.
While such seasonal weakness is usually less pronounced in silver than in gold the broker can’t see the metal outperforming, particularly as it expects a slowing in fabrication demand during the northern summer and for jewellery manufacturers to wait for late summer before rebuilding inventory levels.
Assuming the seasonal weakness comes as expected the broker suggests using it to increase exposure to the metal as the fundamentals suggest prices will yet go higher. It points out total fabrication demand for the metal last year was 841 million ounces, which implies the market was in a slight deficit given new mine supply totalled 646 million ounces and total silver produced from scrap was 188 million ounces.
The increase in demand was driven by industrial uses and importantly these were more than enough to offset weaker demand from the photographic industry as a by-product of the growing use of digital cameras.
Again taking a medium-term view the group expects ongoing tightness in the market as the metal price generally should be boosted by a likely weaker US dollar, while the strong industrial demand is expected to continue.
At the same time it expects significant new supply to have a reasonable lead time before reaching the market as a number of major projects such as the eight million ounce per year San Bartolome and four million ounce per year Palmajero mines are only coming on-stream during 2008.
By 2010 these new projects should change the market balance as the broker sees supply increasing significantly, estimating an addition of as much as 10-15% to current global output. One important point the broker notes is silver production is less influenced by the underlying metal price than is gold or other metals, as in many cases it is a by-product of other metals and so is produced almost regardless of the silver price.
Another factor supportive for silver in the broker’s view is the relatively recent establishment of silver ETFs or exchange traded funds, which allow investors to gain exposure to the commodity without the production risk attached to buying shares in a mining company. The establishment of ETFs also requires the buying of physical silver as the underlying instrument, which increases demand for the metal.
After averaging US$11.55 per ounce in 2006, up 58% from its 2005 average, the broker is forecasting an average price in 2007 of US$12.75/oz, increasing to US$13.00/oz in 2008 and US$13.50/oz in 2009.
ASX-listed Bolnisi Gold (BSG) is currently proposing a merger with Canadian companies Coeur d’Alene and Palmarejo Gold which is believed would create the world’s largest direct leverage play in silver.