BIG PICTURE MOVE ON SILVER FOR THE YEAR 2010

SUMMARY:-


· Prices continue to out perform Gold on both the upside and the downside. In 2010, Silver is expected to range between $13/oz and $25/oz.

· Investment demand is expected to remain strong in 2010, but a rebound in fabrication demand should see buying pressure increase.

· After the slump into recession in 2008, the recovery has been fast, but we doubt it is sustainable and therefore expect further distress to be seen in the months ahead.

· The dollar may be oversold in the short term, but structural problems suggest further dollar weakness is likely and that could lead to a dollar crisis.  With the supply overhang, investors are going to have to continue buying Silver, but given their current interest and the big picture outlook, this is likely to happen.

Introduction :-


Since moving above $10/oz in March 2006, Silver prices have been on a roller-coaster ride with some fast and long rallies interspersed with steep and aggressive sell-offs; none more so than the drop from $21.36/oz to $8.50/oz between March and October 2008. However, the strong rebound after last year’s sell-off does indicate ongoing steady interest. Silver has benefitted from being both an industrial metal and a cheap precious metal, as industrial metals have rallied strongly in anticipation of an economic recovery and as a cheap precious metal, it has won market share from Gold jewellery. Also as a precious metal it has been sought after as a hedge against dollar weakness and financial distress. Given the diverse nature of Silver demand, prices are expected to perform well as even if weakness is seen in one area of demand, the other
areas should hold up and indeed could see demand accelerate. Silver also does not have the threat of IMF sales overhanging it. Generally for these reasons we feel there is still good upside potential for Silver and with prices (basis $17.50/oz) still 18% below last years’ highs and arguably still 185% below the 1980 highs, the outlook remains bullish. However, given Silver’s supply/demand situation the outlook for Silver can only be bullish while investors remain as committed to buying Silver as they have been in recent years. Over the past five years fabricated demand has on average been around 2,000 tonnes lower then supply. While investors are prepared to buy this surplus then higher prices can be seen, but should investors’ interest wane then Silver prices could tumble. Overall, we remain bullish for Silver as it is likely to follow in Gold’s footsteps and at times outperform it. In last year’s Forecast report we were looking for the bulk of trading in 2009 to be between $11/oz and $18/oz; the low in January 2009 was $10.33/oz and the high has so far been $17.93/oz. In 2010, we feel Silver will trade within a $13/oz to $25/oz range as we expect more turbulence in the financial markets
Industrial Demand :-


Industrial demand accounts for 43% of total Silver end-use demand and is of paramount importance to the Silver market. In recent years global growth has been expanding at a fast pace, but this slowed to 1.4% in 2008 and is off significantly so far in 2009. Indeed industrial demand is expected to drop some 12% this year, but is expected to recover next year as a more broad based recovery is likely. The IMF forecast for World economic growth is 3% in 2010, after a 1% drop in global GDP in 2009. With industrial applications accounting for 54% of fabrication demand, which is up from 38% ten years ago and with India, China and the US, accounting for 70% of this rise in industrial usage and with Silver now being used in a wide
spread of new applications, demand is expected to recover faster than GDP growth. As such, we expect Silver’s industrial demand to grow around 7% in 2010. In addition to growth picking up more than global GDP, after the destocking seen over the past year, we expect restocking to see apparent demand rise even faster than actual demand. Therefore the combination of restocking, a pick- up in actual demand and ongoing investment buying, could certainly see Silver prices continue to rise strongly


Investment demand :-


With Silver supply outpacing fabrication demand in recent years, investors’ off-take has been critical in driving the overall bull market and the emergence of Exchange Traded Funds (ETFs) have been central in
facilitating this growth in investment demand. When the first ETF was launched in April 2006, it started with 653 tonnes of Silver, the peak holding to date was 11,112 tonnes, seen in August this year. As the chart opposite shows growth has been strong and steady; there have been periods of light redemptions along the way, but the trend is firmly up. At the end of September 2009, the combined holdings stood at 10,958 tonnes, which is 1.4% below the peak, but still 32% up since the start of the year. In 2008, the combined holdings grew 2,326 tonnes; in the nine months to the end of September 2009, the ETFs have grown by 2,702 tonnes. The fact that redemptions up until now have been light, suggests that long term investors are still buying into Silver’s safe-haven purposes.The presence of this above ground Silver stockpile is a potential threat to prices if mass liquidation were to unfold, especially as the total combined holdings is equivalent to roughly half a year’s mine supply. However, in the current environment of financial uncertainty and dollar weakness we would be surprised if investors were ready to sell the protection Silver offers them. This is especially so as prices are still well below the peak seen in 2008 at $21.36/oz. However, there is no denying the fact that the Silver in the ETF’s is potentially very liquid and therefore trends in the ETFs’ holdings need to be monitored carefully


More room for speculators :-


The net Fund Silver position pulled back heavily during last year’s second half selloff, but the position is climbing again and remains well below the peaks seen in 2006, 2007 and 2008. With the net long position
last at 47,410 contracts, it is still 12.4% below the peak in 2008 and 29.2% below the high in 2006. So with Silver prices also 23% below their 2008 peak, there seems good potential for prices to rise if the situation
remains bullish. Indeed, in this respect, Silver looks better placed than Gold to extend gains as the net long Fund position in Gold is already at record levels. As such, it does look as though Silver will continue to outperform Gold on the upside.


Technical outlook;-


Following the rapid sell-off in the second half of 2008, Silver prices have been trending higher again in an upward channel. Prices recently tackled the band of overhead supply seen between March and July last year between $16.20-$19.00/oz, but resistance was encountered around $17.65/oz and prices have now pulled back to consolidate. With the stochastic indicators also crossing lower Silver prices may now pull back towards the bottom of the channel which is around the $14/oz level, which is also where the 30 week (150 day) moving average is. However if the up channel continues to push prices higher then prices are likely to gradually overcome the overhead band of supply - the top of which is at $19.47/oz, which would then open up the way for a rechallenge of the highs at $21.36/oz.


Conclusion and Forecast :-


The situation in Silver is very interesting, even before the recession the market was running a supply surplus and this was made worse by the drop in demand, even though supply was cut too. However, the distress in the markets and concern over how this financial mess and the global imbalances are going to be corrected has increased demand for safe-haven assets, such as the precious metals. In the medium term, while the supply surplus is present, Silver will be vulnerable if investors’ commitment to Silver wanes. If investment interest fails to soak up the annual surplus prices are likely to fall, indeed falling prices would then no doubt trigger liquidation of existing positions that would add to the downside pressure on prices. However,
we do not think such a scenario will unfold between now and the end of 2010, although there is no harm in having a contingency plan for when such a time arrives. Investor interest as seen by the steady climb in the ETFs’ holdings shows ongoing strong demand and with ETFs increasing their size by some 2,700 tonnes in the first nine months of 2009, it does look as though this will more than absorb the market’s surplus. With ongoing concern about the dollar and US creditors vocally warning about dollar devaluation, not to mention the risk of a double-dipped recession, there seems plenty of reasons for investors and investment institutions to look to safe-guard their wealth and to diversify their dollar exposure, all of which should underpin demand for precious metals.In the near term, prices are expected to consolidate, but there is also a risk of a deeper correction in equities and industrial metals, that could drag Silver prices lower initially. However, we think dips in Silver prices will be seen as a buying opportunity, by investors and fabricators alike. In addition, we expect fabrication demand to recover later in 2010 and with that is likely to come industrial restocking. So Silver could, for a time, see strong demand from all areas of demand. In addition, we feel Silver is likely to follow in Gold’s footsteps and as such we expect prices to spend the bulk of 2010 within a $13-$25/oz trading range. Should central bankers and politicians manage to find workable solutions to the bigger issues troubling the financial markets then demand for safe-haven products could suffer and then some fast
corrections would likely follow, but we think there is little chance of this happening any time soon and therefore we remain bullish for Silver.