Silver to shine on investor interest, ETFs

By Atul Prakash - Analysis

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"Last year's launch of a silver ETF has withdrawn about a quarter of available physical silver bullion from the market and should this growth continue, a squeeze and spike in silver may result," he said.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