Silver slides 8%; Analyzing the ascent and decent

GFMS data released quite recently indicates that silver mine production will witness another increase in the current year – driven in large part by output hikes in Mexico – and that it could tally a total of 790 million ounces (24,571 tonnes). Unlike in gold, net producer hedging will add considerable tonnage to the supply side in the white metal, as mines could contribute some 40 million ounces (1,245 tonnes) via that process to the market. As well, scrap silver supply is estimated to experience a gain, as high prices continue to draw existing supplies of silver out of current owners’ hands. The total supply of silver in the marketplace could rise by approximately 30 million ounces (933 tonnes) in 2011.

On the demand side, the firm feels that growth in the industrial demand for silver might slow dramatically during the current year “owing to slower global GDP growth and normalization of stock levels. The areas of photography and silverware demand are likely to contract further, while there is hope that jewellery demand might witness a better level of offtake. Government silver sales, after having experienced a sizeable decline in 2007-2009 spiked sharply higher last year, and Russia was identified as the major seller of the white metal (with some 40-45 million ounces coming to market).

Nevertheless, the silver market, as GMFS sees it “will remain in [a] substantial surplus this year.” Investment will remain the single category that must continue to absorb such overhangs (with us since about 2006, at least) if the silver market is not going to “clear” at a significantly lower value equation. That kind of overdependence on investment demand is not exactly an auspicious paradigm for silver.

GMFS also believes that silver’s historically high level of price volatility will continue to be manifest in 2011 and that a wide trading range is still in store for the white metal. We have, thus far, already had a $23+ range within which silver has raced around this year and its Q1 average volatility has already exceeded 39 percent. Factor in April, and those numbers would see a dramatic alteration.

Two items of interest as we go to publication. First, US factory orders rose 3% in April. More evidence that the recovery is real and that there is solid capital spending going on in the country. Exports fared quite well, but the gain was defined by robust demand for machinery and computers. The figure exceeded economists’ forecasts. Perhaps a bit more ammo for the Fed to consider hiking rates, despite last week’s lukewarm posturing on the topic by Mr. Bernanke.

Speaking of which, here is the latest “hawkish” pronouncement from a Fed President, Kansas City Fed President Thomas Hoenig, who, speaking to reporters at a banking conference in Washington, urged the Federal Reserve to increase interest rates from a historically low range of 0% to 0.25%.

Said Mr. Hoenig: "We need to slowly reverse that to calm inflation fears. I can't go anywhere without being asked about inflation. Inflation is being talked about everywhere. I am not concerned about the 1.8% growth rate for the first quarter, saying that special factors limited growth and forecast growth at a modest 2.5% to 3% pace over the course of the year.” – reports MarketWatch.

Mr. Hoenig is due to retire from the Fed in October and isn't a voting member of the Federal Open Market Committee.

Until tomorrow,

Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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