Silver Caught in Gold/Dollar Play

Other forms of offtake are about to surpass photographic demand for the first time. Total silver offtake from expanding end-use sectors such as solar panels, batteries and wound care dressing will, for the first time, surpass that of the photographic sector in 2010.

We estimate photographic demand will account for 3,930t of silver (~126 Moz) in 2010, compared with more than 3,972t from these new end use sectors. The photovoltaic sector will see the greatest growth, up 44% on 2009 to 802t, owing to the huge and growing level of investment into alternative energy sources.

Radio frequency identification tag demand will rise 42% year-on-year, to 51t, and silver use in reflective mirrors will increase by 39%, to 723t. By 2011, the difference between photographic demand and total new end-user demand will widen to more than 800t, as the former declines and latter expands rapidly. Silver should therefore receive much more support from industrial demand in the medium to long term, after many years of stagnant consumption, and this will be reflected in higher prices.

Investment declines. Recovery in the U.S. and other OECD economies has yet to materialize as anticipated and sovereign default risk in Greece and some other EU nations has led investors to seek the safety of the USD and Japanese yen.

This has not benefited silver, with Comex investment down by more than 50 Moz since the start of this year and ETFs off by about 4.5 Moz, as at 8 February. Until the EU deals firmly with the debt problems in Greece and recovery becomes clearer in the U.S. and elsewhere, we expect prices to be volatile.

For several months silver has tracked the gold/dollar play; as the USD has weakened the gold price has strengthened. But fears over the strength of global economic recovery and EU member state debt burdens has led to a dash for cash not seen since the peak of the financial crisis. We see little else to preoccupy the markets in the short term, and expect silver prices to be extremely volatile on the ebbs and flows of positive and negative data. Short-term London fix: $14.50–$16.50/oz.