Soaring of silver price resulting amazing demand

GFMS Executive Chairman Philip Klapwijk isn't big on publishing prognostications for the research group's World Silver Survey 2011 report produced for Washington's Silver Institute.

After some prodding by Mineweb, Klapwijk said he expect silver prices to remain in the "top $20s" this year. The Silver Survey noted, "Booming silver investment was the primary source of the astounding 78% intra-year [between January and December] increase in silver prices in 2010."

World investment demand leapt to 279.3 million ounces last year, which GFMS estimated was roughly equivalent to a net inflow of $5.6 billion into silver. Implied net investment rose by 47% to 178 million ounces, with most of the demand concentrated in ETFs and physical bullion bars. GFMS noted coins and medals demand was also strong last year with offtake increasing 28% to a record 101.3 million ounces.

The boom will apparently continue as the 2011 silver price average $31.86 per ounce over the first quarter of this year. However, GFMS observed, "As regards the outlook for prices, GFMS are positive, but cautiously so."

"We believe the economic backdrop for investment will in general remain supportive as monetary policy is unlikely to be tightened that much in 2011 and inflation and sovereign debt concerns will most probably grow further," GFMS suggested. "This will encourage investment demand for silver and, importantly, gold on whose coat-tails silver so often rides. Additional support should also flow through from ongoing solid gains in industrial demand."

Silver mine production increased by 2.5% last year, thanks to new projects in Mexico and Argentina, reaching a record high of 735.9 million ounces . Substantial increases were also recorded for China and Australia.

"Many of the gains at the mine level in 2010 came not from the start of new operations, but from the build-up in production from projects commissioned in 2009, many of which were still undergoing expansion at the end of 2010," said the survey. "Central to the rise were properties in Mexico, where primary silver mines added 9.0 Moz (280 t), helping establishing it as the largest silver production country in 2010.

While Mexico reported a 13% rise in silver production to a high of 128.6 million ounces, Peru dropped to number two in silver mine production rankings. Supply from Peru fell by 6% or 7.4 million ounces as two of the largest primary silver mines-Hochschild's Arcata and Buenaventura's Uchucchacua.

GFMS predicted, "Silver mine production is expected to record another annual increase in 2011, with increases across the gold, silver and lead/zinc sectors."

Primary silver mines accounted for 46% of the gross global increase in silver mine production last year. Production of silver from other metals posted a mixed performance.

For the second successive year, silver mine cash costs were relatively flat year-on-year, averaging $5.27 per ounce.

"Last year saw a dramatic return to net producer hedging, with 61.1 Moz added to the global hedge book, a volume just short of the 1997 record high, lifting the global hedge book at year-end to 86.7 Moz," the survey said.

The most significant hedging activity last year came from Minera Frisco, which made numerous additions to its hedge book at year-end, covering silver, gold and base metal production. GFMS calculated that Frisco's hedge position totaled 50.3 million ounces on a delta-adjusted basis, with 24.8 million ounces of forwards, and the balance comprise of options.

Net government sales of silver increased by 188% to 44.8 million ounces in 2010 as GFMS estimated that total government silver stocks stood at 109.6 million at the end of the year.

Meanwhile silver bullion imports into China, Hong Kong and Singapore fell last year, while South Korean and Japanese bullion imports grew markedly due to recovery in industrial offtake, GFMS advised.

Last year world silver fabrication demand grew 12.8% to 878.8 million ounces, which came within touching distance of the previous record high of 900.7 million ounces of offtake set in 2000. Industrial demand rebounded by 21% last year to 487.4 million ounces, which GFMS attributed to the easing of the global recession and pipeline restocking.

Silver demand in photographic applications fell by 8% in 2010, which GFMS said is "the first single digit percentage drop seen in five years." Meanwhile jewelry fabrication rose to a five-year high of 167 million ounces.

Klapwijk was scheduled to present the World Silver Survey 2011 report at a New York City conference Thursday morning.

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