November 13, 2005
By Kathryn Cooper
Times Online
SILVER is often dismissed as a “poor man’s gold”, but it has risen twice as much as the yellow metal this year and a growing groundswell of investors reckon that this is only the start of a long-term upturn.
The price of silver has leapt 14% to $7.74 an ounce this year, while gold, which has been getting all the attention, is up only 7% at $467 an ounce.
Both precious metals have benefited from their reputation as a safe haven when global inflation and interest rates are picking up, but silver is used far more widely than gold, in industries such as electronics, where it is a key component in circuit boards, and cars, where it is used in heated windscreens, and supply is failing to meet demand.
The white metal may also get a boost from a new silver fund. Barclays Global Investors, part of the high-street bank, has applied to American regulators for permission to launch an exchange-traded fund investing in silver. ETFs are like trackers, in that they follow a market index or the price of an underlying asset. The proposed ETF would initially issue shares backed by 1.5m ounces of silver held in bank vaults, although it would buy more if demand were strong. It cannot be listed in Britain for regulatory reasons, but you could buy it in the US through a broker.
However, the application has run into opposition from powerful quarters. The Silver Users Association, whose members include Tiffany, the jeweller, and Kodak, the photographic giant, fears the ETF will aggravate the shortage of silver and push up prices — bad for industry, but good for silver investors.
When the World Gold Council launched an ETF, the Street Tracks Gold Trust, in New York this time last year, it helped to push prices to their highest for more than 16 years and generated sales equivalent to almost 90 tonnes of gold in its first four trading sessions.
Investors hope the same thing will happen with silver, and they have been buying the metal in anticipation. Analysts say this may have added an extra 50 cents per ounce to the price this year, potentially making it vulnerable to a pull-back if the industry association succeeds in blocking the ETF.
However, silver bulls are convinced there are powerful reasons to buy the metal, even if the new fund does not get the go-ahead. Theodore Butler, an independent precious-metals analyst, said in a recent report: “This is a win-win situation for silver investors. If the ETF goes ahead, the impact on the price will be great. But if it never sees the light of day, it will still prove just how critical the balance between supply and demand has become. If the US government says no to the ETF, it will be for one reason only — there is not enough real silver in the world to fund it.”
The demand for silver from industry and for jewellery and coins has exceeded the supply from mining and recycled scrap since 1990, according to CPM Group, a metals consultancy. Last year, the deficit was an estimated 44.5m ounces.
This gap has to be met from inventories — the stocks of silver held by central banks and investors. However, these stocks have declined from an estimated 2.2 billion ounces in 1990 to about 300m today, according to CPM.
In its 2005 silver report, CPM said: “The amount of silver that remains in inventories is far less than at any time in the past half-century, and in fact since the early 20th century. For the market to rebalance, prices will have to rise enough to stimulate increased supplies from mines or discourage demand.”
The price of silver has already moved. It was stuck in a range of $4 to $5.50 between 1993 and 2003, but has moved up to between $6 and $8.25 since then. Nevertheless, the price is still below its peak of $50 in 1980 — the year when gold touched $800.
CPM said: “The move we have seen is not a sharp spike compared with the increases witnessed in the 1980s, which indicates that the silver price may have further potential.”
And bulls argue that silver still looks cheap compared with gold. You need about 60 ounces to buy an ounce of gold. This is in line with the average of the past 15 years, but in the 500 years until the mid-19th century you needed only 15 to 20 ounces of silver for every ounce of gold because the price was relatively much higher.
Optimists say all the ingredients are in place for a long-term bull market. Butler said: “We are only in the very early stages of a long-term bull cycle for silver. The pace of silver consumption is accelerating, given the growth in the world population and economy. Every new washing machine in India and TV in China guarantees increased silver consumption. But we don’t have enough in inventory to subsidise the shortfall in production. We would be lucky if we have 1 billion ounces left above ground, compared with 5 billion of gold. That is why silver is more rare than gold.”
However, other analysts are not convinced. They say silver has risen purely because gold is back in favour. Yingxi Yu, a silver analyst at Barclays Capital, the investment bank, said: “Silver has been largely tracking the movements in gold, with a lack of impetus of its own.
“The fundamental outlook for silver remains challenging because of declining demand from the photographic industry and an increase in output as a by-product from other mines.”
The photographic industry accounts for 18% of global demand for silver, according to GFMS, a consultancy, but it is declining by about 10% to 15% a year. The metal is used to produce the film for traditional cameras, which are being replaced by digital models. While silver is still used in digital cameras’ circuit boards, the volumes involved are much lower.
Demand from other industries has so far offset the decline in photographic uses, but analysts fear silver could suffer in the longer term as economic growth slows and mines increase production.
The outlook for silver is therefore closely allied to the gold price. If the yellow metal goes above $500, as many analysts expect, silver’s upturn could have legs. But if the gold price slips back, silver could suffer.
And the downturn could be even sharper than that of gold because silver is more volatile than its more valuable cousin. Investors taking a punt on silver should therefore take care.
http://business.timesonline.co.uk/article/0,,9556-1869207,00.html