Silver price rising on increased investment demand

 

According to CPM Group’s 2011 Silver Yearbook, investment demand was the main driver behind silver price increases in the past year. Total demand from investors in capital markets reached 142 million ounces, the third-highest level since the start of data recordings. Meanwhile, industry demand has also increased significantly, contributing to rising output from silver producers. Nevertheless, there was a large gap between new supply from mines and demand in 2010, which amounted to a total of 319 million ounces worldwide.

Although silver producers have increased their output by 33% since 1999, the rising supply has not helped to meet the growing demand in silver markets. While 667 million ounces of silver were produced in the past year, global demand reached 986 million ounces – a stunning gap of 319 million ounces. Record-high demand from the investment community has proven the main driver for the continuing silver price rally in 2010, with the white metal soaring to a peak of $50 per ounce in the beginning of May this year. Investors are buying silver in order to hedge against continuing currency depreciation. Furthermore, investors' capital flight to the silver sector – comparable to the situation in the gold sector – seems to also to be driven by increasing fears of inflation.

While silver demand from the photography sector has steadily declined in recent years, this downturn in demand was more than offset by other industry sectors. Since 1999, silver consumption among end users in the electronics industry increased by 120%. This development is based on the ongoing miniaturisation of electronic components, to which silver significantly contributed due to its high versatility. Since the year 2000, in which the solar industry started its globally triumphal march, the use of silver has increased by 640% due to the production of solar panels as well as solar cells. Silver has also developed to one of the most respected antibacterial agent in the medical sector as it became an important part of research and new medical applications. While this sector represented nothing more than a small niche back in 2002, the sector's demand increased six-fold by 2010.

The prestigious Silver Institute recently announced that industrial silver demand will increase globally by approximately 36% to 666 million ounces in the next five years. The price should find a good support in the wake of this development as industrial end users are expected to likely take the chance of buying price dips on futures and options markets in correction phases. This way, they can stock up on inventories at lower price levels. In addition, silver investments only amounted to a negligible share of 0.007% of worldwide assets held by investors at the end of 2010 – despite its stunning price performance in the course of the last year.

Comparing these data with the year 1980, in which the silver price marked its record high of slightly more than $50 per ounce, the white metal is still providing investors with an enormous upward potential. Silver holdings accounted for 0.34% of worldwide assets held by investors in the record year 1980. This is theoretically providing silver with a further upward potential of 48 times from its current price level in order to reach the same figures recorded in 1980. Investors have to consider as well that today's global money supply is significantly higher than it was 30 years ago. Part of this liquidity will find its way into silver markets and prove to be the main driver for the future price development of silver.