Editor's Note: Prices for many precious and base metals hit record highs in 2010, as economic uncertainty rattled around the globe. What does 2011 hold for gold, silver, platinum, palladium, copper and other metals? Kitco News reporters have prepared a series of stories which examine what is in store for 2011, not only for metals but for currencies, stocks and the overall economy: 2011 Precious Metals Outlook

(Kitco News) - The outlook for silver supplies for 2011 depends on how one measures investment demand and its impact on supply.

Mine supply is expected to grow in 2011 as higher metals prices in general encourage production. While there are primary producers of silver, it’s often a byproduct of mining for other metals like zinc, lead, gold or copper.

Silver prices are around $28 an ounce, but rose a little over $30 an ounce in 2010, making multi-decade highs, while gold and copper prices hit all time highs.

Normally, when supplies of a commodity grow, it caps price gains. This hasn’t been the case for silver as investors are seeking the white metal as a safe haven investment in uncertain times and a cheaper alternative to gold. Fabrication demand for silver has picked up as manufacturing globally has grown, but by far and large, investment demand has been the driver of the silver rally.

But investment demand can be fickle, which is why some market watchers are hesitant to use it in their calculations for demand estimates. It can cause price volatility and is difficult to gauge, unlike fabrication demand which is easier to measure.

Investment demand has grown with the advent of exchange-traded funds and the most popular of those are usually physically backed, meaning they will buy metal and store it in secure vaults. As easily as that metal can go into storage, it can come out, causing swings in physical supply.

As of mid-December silver held in exchange-traded funds reached 15,251 metric tons, a record. One metric ton equals 32,150 troy ounces, so that calculates to over 490 million ounces held.

Estimates for mine supply vary between analysts. The CPM Group pegged 2010 mine supplies at 741.5 million ounces, noting nearly all the product came from Goldcorp’s Penasquito mine in Mexico, which added 20 million ounces alone. Total supply, which includes scrap and other supplies, is seen at 1.028 billion ounces, up from 940 billion in 200.

For 2011 CPM Group forecasts mine production at 769.8 million ounces (1.067 billion total) and they increased supply output estimates from primary producers to 22% from 20%. “It’s an indicator that higher silver supply justify silver projects,” said Erica Rannestad, commodities analyst with CPM Group.

Others are less optimistic on supply.  BMO Research expects silver from base metals and gold mining operations to increase at an average of 1.8% annually over the next two years. They target 2010 total supply at 887 million and 903 million in 2011. BNP Paribas sees 2010 supplies at 928 million ounces and 2011 total production at 915 million. The reduction there comes from less scrap supply.

While mine supply might grow only in nugget-size chunks, Barclays analysts pointed out in a research note that mine supply is hitting record highs.
Look At Demand

Fabrication demand, which has been growing on ideas the global economy is rebuilding, will help chip into some of the growing supply.

Rannestad said there’s been steady demand on the fabrication side, primarily in the consumer electronics side. There are also pushes being made into green technology for silver’s use in solar and in the medical field as a biocide.

CPM Group estimated total fabricated industrial demand, which includes electric batteries, biocide and coins, in 2010 was 875.6 million ounces, which is expected to grow to 907.1 million ounces in 2011. BMO estimated 2010 fabrication demand at 783 ounces and sees it at 833 ounces in 2011. BNP Paribas puts it at 825 million for this year and 861 million for next year.

What’s left is available for investor demand and that’s where it gets tricky. Rannestad said it’s difficult to forecast investor demand as it’s an implied number based on supply and demand. CPM Group sees it growing in 2011, but has no estimate for it. In 2010, CPM Group estimated investor demand nominally at 82 million ounces.

That figure is similar to BMO’s 2010 estimate of 75 million ounces, but they forecast investment demand at 100 million ounces and that will overwhelm total silver supply. They estimate a supply deficit of 30 million ounces in 2011 as a result.

BNP Paribas estimates ETF inflows and other implied investment at 103 million ounces this year and 101 million ounces next year, but is breaking it out separately from its supply and demand estimates.  If their estimated investment demand were included in the balance sheet tables, it would show a deficit, rather than a surplus.

The fact that supplies could be in surplus or deficit depending on how its calculated doesn’t sit well with some market watchers. Barclays Capital said this factor limits how favorable they are to the white metal. “We are less positive on silver relative to gold,” the bank said in a research note.

Rannestad said talking about surpluses can be misleading because of silver’s role in becoming a financial asset. “A lot of the investment demand is physical. You can’t just look at fabrication demand versus supply because of investment. As long as investment demand is strong (silver will be up). That’s why we’re seeing a lot of supply coming on stream.”

Puru Saxena, chief executive officer of Puru Saxena Wealth Management said he’s not bothered by supplies at this point because of the catalyst from investment demand. “Eventually if prices continue to rally, supply will catch up as more mines become economically viable,” he said.

Like gold, silver is benefitting from concerns about the vitality of paper currencies and given that silver remains far from its historic highs, the white metal has room to run higher, he said “This will end in a massive euphoric bubble, but probably not for another two to three years,” Saxena said. Much higher interest rates, like what was seen in the 1970s will depress silver.

Miners are able to increase production because of the higher prices. Rannestad said cash costs for miners in 2009 were $5.26 and 2010 it is $5.38. BMO said the costs for primary miners and producers, after considering operating costs plus capital expenditures per ounce of silver production, puts a break-even at $14 an ounce.

That’s below the current value of around $28 for silver.  As long as investment demand stays firm, CPM Group sees silver prices next year averaging $24, versus the 2010 average of $19.97 so far. BMO estimates silver prices averaging $28 in 2011, BNP Paribas forecasts an average price of $25.30 in the first quarter of 2011 and Barclays has an average price of $28.10.

By Debbie Carlson of Kitco News dcarlson@kitco.com

2011 Precious Metals Outlook

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