(Kitco News) - Silver is likely to trade above $30 an ounce in 2011 mainly due to investors’ growing appetite for the metal, also helped by a further recovery in industrial demand, said the consultancy GFMS in its Interim Silver Market Review released late Wednesday.

GFMS forecast the metal will average $19.94 an ounce for 2010, a 36% increase from the prior year. For the first 10 months so far, the average based on London fixes is $18.61, which does not include the early-November spike to $28.55. Next year, silver should “easily” surpass the annual average all-time high of $20.98 from 1980, the consultancy said.

“In spite of what appears currently to be a substantial end-year correction in price, GFMS still expect silver to trade over $30 in 2011,” said a news release from the consultancy. “However, we are doubtful such elevated levels will be sustained throughout the year and, as a result, we see an annual average either side of $28 as more likely. We could also add that a retreat from over $30 would not necessarily imply an end to the multi-year rally in 2011.”

Global investment, including coins, is set to rise to record levels this year, with the net value reaching roughly $4 billion, GFMS said. Conditions in 2011 are likely to remain “conducive” to high levels of investment, providing the “chief support” to further price gains. Silver’s fundamental demand excluding investment should rise next year, mainly due to gains in industrial uses, GFMS said. However, this will be outweighed by gains in total supply as mine output rises.

“While this might appear bearish, we remain confident that investors will be of a mood to absorb the resultant, growing surplus, as key supports such as ultra-low interest rates, a weakening dollar and a buoyant gold market should remain with us, all of which should be easily enough to rally silver prices yet higher,” GFMS said.

For 2010, GFMS looks for fabrication demand to rise by 10% on a “strong but only partial recovery in industrial uses,” record coin demand and slight growth in jewelry offtake. This will more than counter losses in photography and silverware fabrication, GFMS said. Meanwhile, supply is forecast to rise 5% in 2010 mainly due to modest gains in mine production, double-digit growth in scrap and a rise in government sales.

Mine growth alone is forecast to rise by some 24 million ounces, or more than 3%, this year. Much of the gains come from Mexico (including the ramp-up of Goldcorp’s Penasquito and Coeur d’Alene Mines’ Palmarejo mines), Argentina (ramp-up of Silver Standard Resources’ Pirquitas mine), Chile and Australia (gains at BNP Billiton’s Cannington). However, Peruvian output is declining 5%. Meanwhile, scrap supply is forecast to rise by over 10% this year, while government sales are also expected to rise, mainly due to countries in the Commonwealth of Independent States.

Meanwhile, industrial demand is set to rise by a “healthy” 18% this year, GFMS said. However, such demand remains below 2008 levels. “Limited further gains from stock replenishment, plus a possible slowdown in global GDP growth, should mean less dramatic increases for industrial offtake next year, perhaps ruling out a return to pre-crisis levels despite the surging contribution from the photovoltaic and ethylene oxide catalyst sectors,” GFMS said.

Jewelry fabrication is expected to rise by 3% this year, partly the result of substitution from more expensive gold, which has hit record-high prices. “Further such modest gains are forecast in 2011, taking offtake to a five-year high,” GFMS said. Photographic use is expected to continue declining this year, by 11%, while silver for coin minting is set to rise 23%.

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

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