TORONTO (ResourceInvestor.com) -- Investors buying physical bullion are boosting the cost of silver, a metals analyst told a commodities outlook session at the annual convention of the Prospectors and Developers Association of Canada (PDAC) in Toronto.
"That is the single most important factor pushing the price up," said Jeffrey Christian, CEO of CPM Group in New York. "They are not a residual actor; they are the single most active participants in the market."
Christian, noting the price of silver touched $19.80 in New York on Friday, predicted the price will rise above 1980's average price, which was $21 to $22 per ounces, although there were one-time spikes as high as $38 in New York and $48 in London. On an inflation adjusted basis, the London price would be about $96 today.
During the silver market cycle, in a deficit market for silver, silver is sold from inventories and investors become net sellers, Christian said. During a surplus silver market, investors become net buyers, and it's during these periods when silver prices spike.
"That is the single most important factor driving the silver price up," Christian said. "The increase in silver prices is really a function of an increase in demand in the investors' markets and the futures markets."
Exchange traded funds have become very influential in the market in the past 10 years, holding more than 220 million ounces this year, up from less than 20 million in 2002.
According to Christian, exchange traded funds have absorbed an enormous amount of silver, reducing liquidity in the physical silver market; it also played a major role in the 56% hike in annual silver prices in 2006.
"It's an industrial metal in short supply, and with tighter supplies (than gold)," Christian said.
There are a couple of billion ounces of bullion in world gold reserves, about half held by central banks; the other half held by investors, he said.
"Silver doesn't have those kinds of stocks lying around in bullion form any more, and that makes it a lot more interesting," Christian said.
In certain countries, gold and silver jewellery has been used as a form of savings by the public. But that is now shifting, Christian said.
While demand for silver jewellery dropped last year by 25% in India, that was offset by a 33% increase in investment demand. The metals are still in demand, however, in the form of bullion, medallions, coins.
"We think that the silver price will benefit from a combination of all the factors that are driving investors to hard assets, such as gold and silver," Christian said.
Silver will also benefit from pretty strong fundamentals: supply versus fabrication demand.
Although the demand for silver in photography is dropping with the increase in popularity of digital photography, here was a 15% increase in industrial demand for silver last year, Christian said, mostly for electronics and plating applications, many of which are electronics themselves.
"So a very strong fabrication demand is driving silver, not only in India, but elsewhere," he said, "and will probably continue to, even though the price has already risen sharply, on top of the surging investment demand."
