Silver prices seen strong in 2011 as demand

Silver prices are seen maintaining more than three-decade highs even as new mine output of silver is forecast to rise 8 percent for a year ago to 800 million ounces in 2011, keeping up with expected growing demand, metals consultancy GFMS said on Wednesday.

A recovery in industrial demand for silver, record US coin sales, strong investment demand for silver-backed exchange traded funds, and a surge in demand from mining companies to borrow the metal for hedge programmes have led to a squeeze in the physical silver market recently. Silver prices hit 31-year highs around $34 an ounce earlier this week and Walker said the average silver price for 2011 could range 40-50 percent higher than the average in 2010, although it still well below its all-time high near $50 set on Jan. 18, 1980. It could rise higher than $35 ... $40 is not an impossibility this year if gold performs incredibly well, and drags silver higher. But the question is, how long will it remain there? Paul Walker, GFMS's chief executive officer, told Reuters in an interview.

“We are expecting a reasonably robust increase (in new mine output) this year. The rise in mine output should keep silver still in a surplus,” he said.

Silver, an excellent thermal and electrical conductor, is used in electronic applications such as conductors, switches and fuses, as well as in photovoltaic cells, LEDs and sensors. Silver often tracks gold, and because of its industrial use, its is also influenced by base metals. Gold hovered around $1,400 on Wednesday, well below a lifetime high around $1,430 struck in December.

Walker said overall demand is forecast at 885 million ounces in 2011, up 18 percent or 135 million ounces since 2009, while supply growth is forecast at about 13 percent or 90 million ounces over the same period, showing a slightly tighter balance in demand and supply.

Walker, who said there was no cause for concern about supply shortages, said world industrial demand for silver was 440 million ounces in 2010 and was expected to rise to about 500 million ounces this year.

It's a natural consequence of a good demand side story, a lot of silver stock being neutralised in ETFs, and investment flows pushing the price higher. But I wouldn't read too much into this backwardation as being some evil squeeze, Walker said.

There is, without a doubt, plenty of above-ground stocks of silver available. It's just a question of willingness of people to lend that stock to the market, Walker said, adding that while this situation may remain for some time, he would not expect it to last long.

Hedging, which allows producers to guarantee prices for future output, tends to push up lease rates and near-term contract prices. Traditionally, miners used forward hedging to lock in future prices for their product.Silver around $35 an ounce was an attractive level of hedging and likely to prompt many producers to hedge, he said.

(Source: http://www.financialexpress.com/news/silver-prices-seen-strong-in-2011-as-demand-grows/754041/0)