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Silver Institute: Physical Silver Demand Rises 13% In 2013 To Record High

By Allen Sykora Kitco News
Wednesday May 14, 2014 8:30 AM

(Kitco News) - Global physical demand for silver rose by 13% in 2013 to an all-time high of 1.081 billion ounces, according to the World Silver Survey 2014 released Wednesday by the Silver Institute.

The rise was driven by a 76% increase in retail investment in bars and coins coupled with a recovery in jewelry and silverware fabrication, the report said.

Data for the World Silver Survey was compiled independently by Thomson Reuters GFMS. The Silver Institute has published the annual report since 1990.

Andrew Leyland, manager for precious-metals demand for the GFMS team at Thomson Reuters, identified three major trends in the silver market during 2013 that were attributed largely to a 24% decline in the average price.

“The first was the reaction from the price-elastic markets, in particularly jewelry and silverware,” he said, pointing out that jewelry fabrication was up nearly 10% and silverware was up 12%. “They were very much price-sensitive moves, with people feeling they could put more silver content into silverware and move away from plated (silver) products into more sterling silverware products.”

These were trend changes, he said, pointing out that previously jewelry demand for silver had declined three straight years and silverware for eight in a row.

“The second major trend was a big increase in investment in silver,” Leyland said. And, he later added, “the third major trend impact (of lower prices) was the scrap market. There was a 24% decline in the amount of silver scrap entering the market in 2013.”

The report listed total silver supplies in 2013 of 978.1 million ounces that was down from a year ago due to the reduced scrap. When factoring in an exchange-traded-fund inventory build of 1.6 million ounces and an exchange inventory build of 8.8 million, the net supply balance in the silver market was a 113.3 million-ounce deficit, according to the Silver Institute.

The report said the physical deficit in the silver market was the largest since 2008.

Silver prices fell with gold in 2013 largely due to investor liquidation of silver futures and options positions and sales from large investors’ physical inventories, said the report. Still, silver averaged $23.79 an ounce, which the Silver Institute pointed out is the third-highest nominal average on record.

“Lower silver prices stimulated increased buying among bargain hunters and boosted growth from the more price-sensitive sources of demand,” the report said.

The report said 2014 “looks likely to be a year of consolidation” for silver, with prices settling into a “less volatile trading range” and many jewelry and silverware producers looking to take advantage of this in order to boost production and move away from plated silver products.

In an interview with Kitco News, Leyland said the consultancy retains its forecast for silver prices to average $19 an ounce in 2014, which would imply a slight decline from current levels. The softer forecast decline is not the result of silver’s supply/demand fundamentals, with this expected to improve with jewelry and silverware demand still rising. However, the consultancy looks for some investors to rotate from the precious-metals sector toward other assets such as equities and bonds, Leyland said.

Silver Bar, Coin Demand Rise Sharply

Total identifiable investment demand, which includes physical bars, coins and exchange-traded-fund inventories, rose by 27% to a three-year high of 247.2 million ounces last year.

This was fueled largely by the rise in retail purchases of silver bars and coins. By contrast, investors were net sellers in the futures market, while growth in ETF holdings showed was modest, said the report. Data from the Commodity Futures Trading Commission showed that net speculator investor positions at the end of 2013 were down by 45% from the end of 2012, the World Silver Survey said.

Demand for physical bars more than doubled last year to a high of 127.2 million ounces. This was led by strong gains in India, encouraged by a decline in local silver prices in the second quarter of 2013, along with the government’s restrictions on gold imports to combat a wide current-account deficit, the report said. Notably, the Silver Survey said, Indian silver bar investment of 80.7 million ounces last year was the highest on record and eight times more than 2012.

“There were shortages of gold in India, leading to very high local premiums,” Leyland said. “What this did was push some of the investors there into buying silver bars as an alternative asset if they wanted a physical asset to own.”

Global purchases of silver coins and medals climbed 38% to a record 118.5 million ounces.

“Silver coin investors entered the market in droves sto take advantage of the lower price as its previously high level had priced many potential investors out of the market, or at least capped the volume of their purchases,” the report said. “The trend was especially pronounced in North America, which saw annual silver coin fabrication in the U.S. and Canada grow by 27% and 62% year-on-year, respectively. Combining bullion and numismatic coins, we estimate that the U.S. and Canada produced a total of 44.2 Moz and 29.2 Moz of silver coins, respectively, in 2013. In both countries, this was the highest level of silver coin fabrication ever recorded.”

The rise in silver ETF holdings in 2013 was modest at 1.6 million ounces, compared to 55.1 million in 2012. However, at least holdings held up during a year in which the amount of gold in ETFs fell sharply. Leyland noted the current silver ETF holdings of roughly 648 million ounces are not far from the peak of 656 million.

Jewelry, Silverware Demand Rise; Industrial Use Nearly Flat

Jewelry fabrication rose 9.6% to a record high of 198.8 million ounces last year, the first increase in three years.

“Last year’s recovery was driven by the improved economic outlook in the industrialized world, which lifted consumer confidence and retail sales, and a marked decline in the silver price that saw a positive response from price-sensitive developing markets,” the report said. India’s demand rose 29% to its highest level since 2001, and China also posted a double-digit rise.

Global silverware fabrication rose 12% to a three-year high of 50 million ounces. Much of this increase was due to gains in India and China, which together contributed to 61% of global fabrication, compared to 37% a decade ago, the report said. “Excluding these two countries from the global total, demand elsewhere dropped by 6%.”

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The largest component of silver demand was industrial applications, which dipped by less than 1% to 586.6 million ounces. This accounted for 54% of total physical demand, according to the report.

“The sector itself is growing, but you have this continuing thrifting away with people trying to use less silver per device,” Leyland said. “But the ultimate number of devices is increasing. Also, the photographic sector continues to decline.”

Asia was the one region with higher industrial demand, posting a 3% rise. This was led by China and its continued recovery in the electrical and electronics sector, along with gains in the Chinese ethylene oxide industry. Japanese industrial consumption of silver also rose.

Photography demand, already in a slide due to the move toward digital cameras and cell phones, fell another 7% to 50.4 million ounces in 2013. However, the report said, this was the slowest percentage decline in nine years.

Also, Leyland said, the amount of silver used for solar panels fell to 40 million ounces last year from 51 million in 2012 and a peak of 66 million in 2011. The decline occurred on reduced use of silver due to new technology and substitution away from the metal, as well as reduced government subsidies to encourage production of solar panels.

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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