Silver to shine on investor interest, ETFs

A miner clutches silver extracted from a silver mine 20 miles southeast of the Kosovo capital Pristina, May 30, 2006. Investors and exchange-traded funds regardless of fundamental factors may drive the price of silver to new highs this year, having already tripled in four years, analysts say.

LONDON (Reuters) - Investors and exchange-traded funds regardless of fundamental factors may drive the price of silver to new highs this year, having already tripled in four years, analysts say.

But prices are only likely to gain momentum after breaching last May's 25-year high of $15.17 an ounce, which compares with current prices of around $13.70.

"For silver to really look bullish, it has to get above $15. If we get above that, I believe silver could go to $20," Peter Hillyard, head of metals sales at ANZ Investment Bank, said.

"Silver, for long periods, remains ignored and suddenly sparks to life. The ETFs will be important to attract investor interest," he added.

Analysts say exchange-traded funds (ETFs) have the potential to absorb a sizeable portion of the above-ground metal supply and push the market into deficit, making silver more attractive.

High prices have hit jewellery demand in past years and offtake from the photographic industry, a major silver consumer a decade ago, has been constantly falling due to the growing popularity of digital photography.

But industrial demand is growing fast, compensating for some of the losses in other sectors. Mine output has been moderate, but new projects are expected to lift output in the long run.

Silver spent four years, starting in 1999, between $4.00 and $6.00 and ounce and the next two years to late 2005 in a trading range of $5.00 and $9.00. But prices have been volatile since early 2006, hovering in a broad trading range of $9.00-$15.17.

"I would prefer to continue along this path of two steps forward, one step backward to consolidate gains. That creates a much healthier market than the mania that enters the space on occasion," said Neal Ryan, director of economic research at Blanchard and Company, a leading U.S. precious metals dealer.

"By the end of the year, I would expect to see prices challenge the $18-$20 level."

ETFs TO DOMINATE

The growing popularity of ETFs and a bullish outlook for other precious metals are expected to generate investor interest into the metal going forward, analysts said.

"Silver, like gold, is largely a play on investment and speculative demand rather than a pure commodity supply and demand story," said John Reade, head of metals strategy at UBS Investment Bank.

"Last year's launch of a silver ETF has withdrawn about a quarter of available physical silver bullion from the market and should this growth continue, a squeeze and spike in silver may result," he said.

A silver fund SLV.A by Barclays Global Investors, launched in April last year, now holds 137.75 million ounces of silver, while recently listed funds by London-based ETF Securities and Zurich Cantonal Bank have cornered another 3.38 million.

That compares with more than 900 million ounces of global silver demand in 2006.

"The sheer scale of silver ETF holdings makes the market vulnerable, should there be a shift in investor sentiment," said James Steel, precious metals analyst at HSBC Bank.

"However a mass exodus of the silver ETF is unlikely. We believe the silver ETF investors to be long-term strategic investors."

FUNDAMENTALS LESS ATTRACTIVE

Analysts said investors would play a key role in setting price trends going forward, rather than relying on the market's pure supply and demand fundamentals.

"With silver's own fundamentals comparatively neutral, there is room for investment to play a decisive role," said Natixis Commodity Markets in a recent research note.

According to precious metals research firm GFMS Ltd., silver fabrication demand fell nearly one percent to 840.5 million ounces in 2006 from a year earlier.

Mine output rose just 0.06 percent to 646.10 million ounces in 2006, but analysts say that high metal prices were now translating into significantly higher new mine production.

Production in countries such as Mexico, Bolivia and Peru are expected to rise in the coming years, making some analysts less positive on the metal's price outlook.

"My medium- to long-term view on silver is bearish. Fundamentally, there will be a large increase in new silver production mainly coming from South America," said Jeremy East, head of metals trading at Standard Chartered Bank.

"The main impact has already been seen from investor products and the same level of demand won't be expected to be repeated."