Investor expectations of silver prices in 2011

Investment demand for silver is likely to grow in 2011 and as a result prices should continue to rise over the course of 2011.

GFMS Executive Chairman Philip Klapwijk predicted that the price of silver could trade higher than $ 30/oz next year, he said he expects a wave of domestic demand for metals continues to come to market in 2011.

"f we look at calendar 2010 there has been a significant lift in investment in silver - it's possible that silver investment this year on a net basis may reach close to US$4billion in size and it's probable that next year we will see a higher figure and a larger scale of investment from both institutional and private investment sources."

Asked about the geographic spread of this investment demand, especially in light of the recent worries over Ireland's debt situation, Klapwijk said much of it is still coming from Western markets in the form of ETFS, futures market investments and quite a substantial amount of over-the-counter market investment.

He says, "Our supposition is that the majority of this investment is probably taking place from western funds or western private investors although there may be some investment from outside Europe and North America that is being made in vehicles that are listed in western markets such as New York or London, or taking place via local London over-the-counter market.

He adds that the recent robustness seen to the price is clearly dollar related, "When we've seen the dollar for example recently, appreciate against the euro that has led to some downside to silver prices, but it's interesting to see how silver really has held up remarkably well in recent sessions, notwithstanding a significant move higher in the US Dollar against the euro and that's pretty encouraging in terms of its prospects next year because what it seems to suggest is that even during periods of US Dollar appreciation, silver and indeed gold might do reasonably well because of the reasons why the dollar might be appreciating under those circumstances."

He also says there has also been an uptick in silver investment demand in India and China for silver bullion products.

However, while Klapwijk is positive on silver's prospects next year he does say that over the longer term the supply situation could prove problematic.

In contrast to the gold market, he says, where production peaked in 2001, despite consistently higher prices, silver production has grown by almost 130m ounces from 2001 to 2010 and the prospect is for further increases.

"At the moment, that extra silver is being absorbed without a problem. Investors are quite willing to buy it seems, larger amounts of silver at higher prices, but it is swelling the surplus that has to be taken off the market by investors and the question one has to ask therefore is what happens if and when prices head south because of changing external circumstances?

To answer, his own question, he says, "I imagine that that would indeed provoke that type of fall in prices in order to allow the market to clear.

But adds, "It's highly improbable that it's going to happen next year because if we look at investment next year we're likely to see circumstances that continue to favour investment in precious metals.

"We have a situation of zero or actually negative in real terms, interest rates - we have the major reserve currencies all under a certain degree of suspicion. We have a situation in which quantitative easing in the United States and in certain other countries is raising inflation expectations and given this sort of backdrop, it is highly unlikely that we're going to see any end to the investor interest which can grow considerably given the fact that a lot of the real money managers are still not committed or have not made any commitment to gold or silver.

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