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Tony Daltorio
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Earned a bachelor's degree in physics from the University of Pittsburgh before deciding to switch gears and pursue a career in the financial field. I went on to earn an MBA, also at the University of Pittsburgh. I worked for nearly three decades in the investment business, including nearly two... More
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  • Hi Ho Silver...Away?? 0 comments
    Jun 12, 2010 2:26 PM | about stocks: PAAS, SLW, SSRI, MVG

    There is another precious metal which is currently almost as popular as gold among precious metals investors. That metal is, of course, silver.

    Silver had a good 2009...gaining 53 per cent in value while coming in with an average price of $14.67 per ounce. That is its second highest annual average price since 1980.

    The shiny metal has also done extremely well over the course of the last two decades. Silver hit its low in February 1991 at a price of $3.51 an ounce. It is now trading at over $18 an ounce...this works out to an annual gain of about 9 per cent. That is a performance many stock investors wish they had over that period.

    The latest World Silver Survey conducted by precious metals consultancy GFMS points to silver prices moving even higher. GFMS forecast that silver prices are likely to hit $20 an ounce this year supported by flat supplies and double-digit growth in industrial consumption and strong investment demand.

    The consultancy said that supplies of silver last year were nearly flat at 889 million ounces. Silver mining output did rise 3.6 per cent to nearly 710 million ounces, but overall supplies were flat due to lower scrap flows and government sales. These sales dropped 86 per cent to just 20.2 million ounces. GFMS said that, although mine production was expected to increase modestly, it expects even further reductions in scrap flows and government sales this year.


    Industrial Demand


    Silver does have a number of commercial and industrial uses. It is used in the electrical and electronics sector, the automotive industry, the solar power industry, photography and jewelry.

    And there are three new uses of silver in industrial applications which are gaining momentum including silver oxide batteries, silver conductive inks used in electronics and silver nano-technologies used in various medical applications.

    The economic slowdown pushed industrial demand for silver last year down by 21 per cent to 352 million ounces...while jewelry demand remained flat at 157 million ounces.

    The sharp drop in industrial consumption in late-2008 through early-2009 hit silver prices, eroding a decade of sustained gains. In December 2008, silver prices fell to $8.42 an ounce.

    However, industrial demand for silver saw a strong pick-up in the latter of 2009, which has continued into 2010. Thus, GFMS is forecasting double-digit growth in commercial demand.

    Much of this rise in industrial demand for silver comes from China. It accounts for about 70 per cent of the world's total industrial usage of silver.

    However, the real story behind silver's recent price rise has been investment demand.


    Investment Demand


    Silver surged last year despite a massive surplus in the silver market of 283.7 million ounces. That surplus mattered little, because investors were there to pick up the slack from other demand sources. Thanks to the financial crisis, there has been an incredible upsurge in demand for silver as a safe haven asset in the form of coins and physically-backed exchange traded funds (ETFs).

    In fact, silver investment currently comprises a quarter of silver demand – a level not seen since the 1970s.

    Net investment in silver surged last year to nearly 137 million ounces, up an incredible 184 per cent from 2008. ETF holdings of silver rose by 132.5 million ounces over the course of 2009 and ending 2009 with holdings in silver of nearly 398 million ounces. Coin demand surged 20.7 per cent to 78.7 million ounces.

    There will be a surplus again this year in the silver market but investors appear more than willing to continue to take up that surplus.


    Silver Investments


    GFMS forecasted that investment demand for silver would remain strong this year for two reasons. It stated that investment demand was expected to be “highly positive given the scope for the sovereign debt crisis to widen and the probability that real interest rates will remain low or negative in all the major currencies for some time.”

    If the GFMS forecast is correct, silver mining companies should benefit greatly.

    Investors can purchase a rather new ETF which holds a portfolio of global silver mining companies. It is the Global X Silver Miners ETF (NYSE: SIL).

    Investors can also opt to buy shares in individual silver mining companies. Some examples of larger companies include: Silver Wheaton (NYSE: SLW), Silver Standard Resources (NASDAQ: SSRI) and Pan American Silver (NASDAQ: PAAS).

    For investors looking for a small cap silver mining company, there is Mag Silver (AMEX: MVG). It is a leading junior silver exploration and development company which has interests in three silver properties in Mexico's Fresnillo Trend. The Fresnillo area is the world's oldest and most prolific silver district.

    The company has 100% interests in two properties in the Fresnillo silver trend – the Cinco de Mayo and Lagartos properties. Mag Silver also owns a 44% interest in the Juanicipio property. Its joint venture partner in developing this property is the world's largest primary silver miner – Fresnillo PLC (Pink Sheets: FNLPF).

    Fresnillo owns about 20 percent of Mag Silver and it has launched an unfriendly takeover “underbid” for Mag Silver in the past. With the price of silver rising, as well as the company's world-class silver deposits, do not be surprised if Fresnillo launches another hostile bid for the company in the near future.

    With continuing worries about sovereign debt likely to remain for the foreseeable future, an investment into silver and those companies who mine it looks to be a wise choice for investors.


    Disclosure: No positions
    Stocks: PAAS, SLW, SSRI, MVG
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