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Economy propels silver price, demand in '08
April 29, 2009
New York--Impacted by the current recession and overall state of the global economy, the silver market has moved into extremely unusual territory over the last year, according to The CPM Group's Silver Yearbook 2009.
The latest research shows that in 2008, economic and financial problems propelled silver prices to levels above $20 per ounce, their highest levels since the early 1980s. Since reaching a high point in March of 2008, prices over the remaining months of the year fluctuated over a wide range, rising sharply, falling rapidly and then rising once again.
Silver prices have been both very strong and very volatile, rising primarily due to interest from investors around the world who are buying silver and other metals as a safe haven and a hedge of their assets.
The fluctuating prices reflect waves of investor buying of historically high volumes of silver, the CPM Group says, as well as interruptions by an unprecedented forced liquidation of leveraged silver forwards, futures, options and other derivative products.
Investors bought more than 100 million ounces of silver last year, more so than in any year since the early 1980s, and they are set to buy even more than 180 millions ounces in 2009.
The silver price averaged $14.97 per ounce in 2008, with a low of $8.40 in October to a high of $21.44 in March. That average was up 11.3 percent from $13.45 per ounce in 2007. It is also the second-highest annual average silver price on record, surpassed only by the $20.65 average of 1980, a year impacted by the last major economic recession that occurred amid a backdrop of political turbulence.
The CPM Group says that the outlook for silver is inextricably linked to the course of U.S. and global economic conditions. The general economic consensus over much of the past six months has been of a bottoming out in 2009 and a recovery emerging by 2010. In that environment, the CPM Group predicts silver to trade between a low of $10 or $12 per ounce and a high of $17 or $18 per ounce.
According to the Yearbook, investor attitudes toward silver serve as the key driver for silver prices.
In 2008, net purchases surged to 102 million ounces--the fourth highest level of net annual investor purchases since the late 1960s.
The CPM Group's projections for 2009 are that investors might purchase as much as 182.1 million ounces, a figure in line with the group's expectations that investors will continue to show interest in buying silver throughout 2009.
Additional key components determining silver's price are supply and demand. It is estimated that total supply increased 2.3 percent to 803.2 million ounces last year, up from 785.5 million ounces in 2007. Total supply is projected to increase another 2.5 percent to around 823.1 million ounces this year.
Of the seven largest silver-producing countries, output rose in Peru, Mexico and the United States, but fell in Australia, Canada, Chile and Poland.
In the United States, silver mine output rose slightly to 39.5 million ounces in 2008 from 39 ounces in 2007. U.S. mine production is expected to decline to 38.5 million ounces this year.
The current economic downturn coupled with severe tightness in credit markets is expected to lower the growth of silver supply in the long run, with many mining companies already having announced mine closures or cutbacks in production.
In terms of fabrication demand, total silver use is estimated to have fallen around 3.1 percent to 701.2 million ounces in 2008. Demand was healthy in jewelry, silver decorative objects and electronics, among other fabricated products. Yet based on a sharp deterioration in demand levels during the fourth quarter of 2008 and the first quarter of 2009, fabrication demand might drop 8.6 percent to around 641 million ounces this year.
Recessionary conditions are expected to take their toll on fabrication demand, and the CPM Group predicts silver use will decline in the United States, the largest silver user in the world.
The use of silver in jewelry and silverware accounts for around one-third of total industrial demand. In 2009, silver for use in such products is projected to decline to 249.9 million ounces, down 11.1 million ounces from 2008.
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