Bloomberg, by Nicholas Larkin
Record industrial demand for silver and resurging investor interest is diminishing a supply surplus, driving the metal used in everything from solar panels to batteries into its best start to a year in almost three decades.
Manufacturers will use 15,415 metric tons, 2.5 percent more than in 2011 and reducing the glut by 41 percent to 3,297 tons, Barclay Capitalestimates. Investors may buy 2,000 tons through exchange-traded products, after selling 1,300 tons last year, Morgan Stanley predicts. Prices will average $37.50 an ounce in the fourth quarter, 11 percent more than now, the median estimate in a Bloomberg survey of 13 analysts shows.
The metal rallied 25 percent since closing at an 11-month low in December, entering a bull market on mounting confidence that another global recession will be avoided even as the World Bank and IMF cut their growth forecasts. Prices had plunged 44 percent in eight months, making it the most volatile of any metal tracked by Bloomberg, as expansion slowed from Europe to China, crimping demand for commodities.
“Silver got hammered and now we’re into a phase where it will do quite well,” said Dan Smith, an analyst at Standard Chartered Plc in London, and the second-most accurate price forecaster tracked by Bloomberg Rankings in the past eight quarters. “Appeal comes from its widespread use in both industry and investment. I think it’s relatively cheap.”
The commodity advanced 22 percent since Dec. 31 to $33.8575, the best start to a year since 1983. The S&P GSCI Total Return Index of 24 commodities rose 3.1 percent and the MSCI (MXWD) All-Country World Index of equities 5.7 percent. Treasuries returned 0.3 percent, a Bank of America Corp. index shows.
This year’s anticipated gains in silver will mean record profit for Coeur d’Alene Mines Corp. (CDE) and Fresnillo Plc (FRES), analyst estimates compiled by Bloomberg show.
Economies may still pose the biggest threat to the rally. The IMF cut its 2012 forecast on Jan. 24 to 3.3 percent from 4 percent and warned that Europe’s debt crisis threatened to derail the world economy. The World Bank reduced its estimate by the most in three years on Jan. 18, to 2.5 percent from 3.6 percent. Global industrial production will expand 2.3 percent, from 4.9 percent in 2011, Macquarie Group Ltd. predicts.
The 0.5 percent contraction in the 17-nation euro region seen by the IMF may curb demand for imported goods. Chinese exports rose 13.4 percent in December from a year earlier, the slowest pace since February, according to customs data. The nation imported 235 tons of silver in December, 36 percent less than the average over the past two years, the data show.
“In the face of weak industrial demand, the short-term investment argument is not entirely convincing,” said David Jollie, an analyst at Mitsui & Co. Precious Metals Inc. in London and the most accurate forecaster in the London Bullion Market Association’s 2011 price survey. “It’s much more difficult to get people to invest for the long term in times of economic uncertainty.”
For now, speculators are getting more bullish. Hedge funds and other money managers more than doubled wagers on higher prices this year, Commodity Futures Trading Commission data show. They held 16,034 futures and options in the week ended Jan. 24, the most since mid-September. The most widely held option gives the owners the right to buy silver at $40 by June, data from the Comex in New York show. The three biggest holdings are all call options at 18 percent or more above prices today.
Investors added 196 tons to their ETP holdings this month, taking the total to 17,492 tons valued at $19.04 billion, within 7 percent of the record reached in April, according to data compiled by Bloomberg. They also bought 6.082 million ounces (189 tons) of American Eagle silver coins, the most in a year, data on the U.S. Mint’s website shows.
Those sales are whittling away the supply glut as industrial consumption strengthens. Global solar-panel installations increased capacity by 70 percent last year, creating enough generating power to supply about 20 million homes, according to the European Photovoltaic Industry Association. The metal is also used in electrical conductors, wood preservatives and alloys, compensating for a slump in photographic film demand.
Eastman Kodak Co. (EK) , based in Rochester, New York, said in 2009 it would stop making Kodachrome film after more than seven decades and on Jan. 19 filed for bankruptcy. Demand for silver from photographic-film makers slid at least 66 percent in the past decade, the Washington-based Silver Institute estimates.
Silver may still be cheap relative to gold, with a price ratio of 51.5, down from 57.4 in December. It averaged 32.4 in 1980, when silver reached a record $50.35 in New York trading. Nelson and William Hunt of Dallas were convicted eight years later of conspiracy for attempting to manipulate prices and were ordered to pay $130 million.
In inflation-adjusted terms, that peak would be equal to $138.31 as of last year, according to a calculator from the Federal Reserve Bank of Minneapolis.
Crystalline silicon solar panels use as much as 0.12 grams of silver per watt, and as much as 40 grams go into a 32-inch plasma television, according to VM Group, a London-based research company. Electronic-equipment manufacturing will expand 5 percent this year, according to Los Altos, California-based researcher Henderson Ventures in a December report.
Coeur d’Alene , which gets about 69 percent of its revenue from silver, will report profit of $241.50 million this year, compared with an estimated $120.25 million in 2011, according to the mean of four analysts’ estimates compiled by Bloomberg. Shares of the Idaho-based company gained 18 percent since the start of January.
Fresnillo will report net income of $988.7 million this year, compared with an estimated $945 million in 2011, the mean of six estimates shows. Shares of the Mexico City-based company jumped 16 percent in London this year.
“Silver is a hybrid,” said Bart Malek, the head of commodity strategy at TD Securities Inc. in Toronto and the most accurate forecaster tracked by Bloomberg Rankings in the past eight quarters. “It benefits from being precious. Later on in the year we’re going to see a bit of a recovery in industrial demand.”