Silver seen at $15/ ounce on rising demand: GFMS

Overseas silver prices are likely to test $15 an ounce in the next few months driven by a rise in global investment demand for the white metal, said Gold Fields Mineral Services (GFMS), a London-based international research body on precious metals.

However, the research body said the target of $15 an ounce in the next few months will be achieved amid sharp price swings.

Falling fabrication demand of 3 per cent (860 tonne) this year is proving to be a dampener on silver prices, the report said.

Of the total silver produced around the globe, about 25 per cent is accounted for utensils, while jewellery remains the largest user at 40 per cent. About 20 per cent is used for coin making, while the rest goes for photographic and other industrial applications.

According to the study, industrial demand was strong till the first-half but slowed down in recent months. The full year gain is estimated at 1 per cent to a new record level.

However, demand is expected to fall in 2007 under the impact of much slower growth in global industrial production and a less strong year for the electronics industry.

Jewellery and silverware fabrication in many countries has not been affected by the silver price rise, the study said.

However, in the case of the key Indian market, a continued secular shift in favour of investment in bullion instead of high-carat jewellery plus the impact of record local prices has had a dramatic impact on demand, it added.

Lower Indian fabrication would translate into nearly 8 per cent y-o-y global fall forecast for this category.

Photographic use of silver is expected to drop by about 11 in 2006 mainly owing to a switch to digital technology and consumer film, which is comparatively cheaper alternatives.

Coin-minting looks to have enjoyed a strong year in 2006, with a sizeable gain in silver use forecast. The study further says that the investment demand has risen in 2006 for the third consecutive year and may well exceed 2,500 tonne this year.

Private investor demand is also growing outside the more visible commodity basket products and the ETF, although this is still modest in volume and, especially in the US, bullion investors have been active on both sides of the market.

Mine production is forecast by GFMS to increase by 125 tonnes or 0.6 per cent this year. In 2007, the mine production is estimated to increase by 500 tonne in total silver output, with strong growth forecast to continue into 2008.

As far as prices movement goes, in the first 10 months of the current calendar year the average silver price shot up by 58 per cent to Rs 19,330 per kg from Rs 12,720 per kg, thus, percolating to the similar rise in London. The price was quoted at $11.24 in London fixing basis towards the end of October.

Investment demand remains the main driver of the price and has raised silver to well above the equilibrium level that would likely prevail in the absence of investment. The silver ETF has continued to attract investors.

An efficient vehicle therefore exists if investor demand surges again. But at some point the ETF could start to represent an overhang, although arguably this risk is moderated partly because the ETF's ownership is broad rather than narrow.

GFMS expects the price to decline only after touching the height of $15/oz in the next few months.