Gold and Silver Snips

A short-term pull back in the price of silver in the next 4 to 8 weeks could well be on the cards after the sharp run-up seen since mid-July but, renewed demand late in the year and in the early parts of 2010, could see the metal challenging the $20/oz level.

This is the view of RBC Capital Markets, which says in its "review of all things silver" it retains its positive view on silver in the short to medium term because of: "Continued fundamental outlook for a weaker U.S. dollar, which we believe in turn will likely result in stronger precious metal prices (both gold and silver)."

Also, the group says, that demand increases for industrial and investment segments are forecast to more than offset continuing decline in photographic demand."

But, while there are also likely to be significant production cut-backs in some base-metals, which is expected to dampen by-product silver output over 2009, the group does caution that in the medium to longer term, it is concerned that "increasing primary silver mine supply" could "eventually cap the upside for silver prices."

On the subject of supply and demand, RBCCM, is fairly bullish given its belief that its view of the silver market and its drivers has been made slightly clearer by "the significant drawdown of above-ground stockpiles over the past 10-15 years to meet the annual excess of global demand over new mine supply"

681 million ounces of silver was produced in 2008, the fifth consecutive year of record-setting results according to RBCCM, and while much of this came as a by product of other metals, a number of new primary silver operations are expected to come on stream in the near future.

And, while the increase is likely to be partially offset by mine closures, the group says, "these new primary and by-product operations could add 75-85MM oz of annual silver production (+10% of global mine supply) by the end of the decade.

Another concern highlighted in the report is Chinese silver production which is currently estimated at about 10% of global mine supply.

While the group says it is a difficult area to monitor as a result of the sheer number of small mines and smelters, it believes China is "a larger player than its domestic production would suggest, as the country is a large importer of metal concentrates (copper, lead-zinc), which are then processed at Chinese smelters and refineries and by-product silver is recovered (for either domestic use, export, or stockpiling)."

Indeed the group believes that China's above-ground stockpile is likely to have increased over the last few years.

It adds that, while "total above-ground stocks may have declined to a few hundred million ounces of silver, our global supply/demand forecasts suggest these levels may be sufficient to meet the demand gap for a number of years. Alternatively, we believe that new demand drivers are required in order to eliminate the remaining overhang from above-ground silver stockpiles."

One of the new key demand drivers is investment directly into the silver market and RBCCM maintains that for 2008, total silver ETF holdings grew by about 100MMoz.

"This year, our outlook is for continued positive demand for the silver ETFs, perhaps slightly higher levels than were seen in 2008. YTD, the iShares Silver Trust has already added 62MMoz, bringing total silver holdings to 280.6MMoz. The other two ETFs have added another 28MMoz, to bring 2009YTD demand to over 90MMoz. As a result, we have increased our forecast for total new ETF demand from 88 to 110MMoz for 2009."

So where does this leave silver prices?

According to the RBCCM report, silver is expected to produce an average price of around $13.25 over the year, before rising to $13.50 in 2010 and settling on a long-term average of around $13 from 2011 onwards.

And, in terms of its relationship to gold, the group says, "The ratio of the gold price to the silver price saw a dramatic move in favor of gold in Q4/08, reaching a peak of almost 85:1. Historical 1-, 5- and 10-year averages were significantly lower (closer to 60:1), suggesting to us back in January the potential for a reversion to the mean opportunity, which we believe could favor silver. This mean reversal has transpired, with the gold/silver ratio retracted to 59:1, and therefore we think this opportunity has played out.

"Given our view of weaker fundamentals for silver (compared to gold), we forecast the gold/silver ratio as more likely to settle out around 70:1, rather than 50:1 (our long-term $13/oz forecast assumes a 73:1 gold/silver ratio).