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New York (Kitco News) - Fabrication demand for silver in 2010 grew for the first time since 2007, while total supply also increased, and both of these trends are expected to continue in 2011, according to a commodities consultancy.

Even though the global economy is forecast to continue growing in 2011 and 2012, demand for safe-haven assets like silver will continue as investors are likely to be extremely sensitive to anything that might derail the economic recovery, said CPM Group, as it released its 2011 Silver Yearbook on Monday.

The average price of silver, using the nearby most-active Comex future settlement price, was $20.31 in 2010, up 38.4% over 2009 and the second-highest annual average price ever, bested only by 1980's average price of $20.65.

CPM attributed the rise in silver prices in 2010 largely to investment demand, but also in part to increased fabrication demand. Economic concerns spurred investors into silver as a safe haven, while rising wealth in emerging markets increased demand for consumer electronics. Further, demand from the solar industry lifted fabrication use.

Annual net purchases by investors totaled 142 million ounces in 2010, the fourth largest on record, CPM Group said. Only in 1968, 1980 and 1983 did investors collectively add more silver to their holdings. It's estimated that roughly two-thirds of the investment demand for silver came in the final four months of 2010.

Silver bought via exchange-traded funds continued to increase, with 122.7 million ounces added in 2010, versus 155.3 million added in 2009. Coin demand surged in 2010, and silver used in coins is estimated to have reached 74.5 million ounces, the highest level since 1967. The relatively low cost of silver coins, compared to gold, should keep this an attractive option for retail investors, CPM Group said. U.S. silver eagle coin sales contributed the most total silver used in coins, at 34.7 million ounces, a record high. This was 46.5% of total silver used in coins in 2010.

The value of investor silver holdings was estimated at $14.7 billion at the end of 2010, the highest level on a nominal basis since 1988, with the record at $42.2 billion – nominally – in 1980. The value of silver holdings is the product of the price of silver and the cumulative silver bullion inventories. On a global basis, however, the value of these assets represents 0.007% of total global financial assets, up from 0.003% in 2004. It was 0.34% in 1980.

Supply Rose In 2010

Total newly refined silver supply rose 4.3% in 2010, to 986.8 million ounces, driven by secondary supply sources.

Mine and secondary supply rose in 2010, CPM Group said. Mine production rose 2.2% to 667.0 million ounces, as rising capital expenditures in the mining sector, rising metals prices, and relatively low silver cash costs compared to the metal's price boosted output. These factors are expected to continue to lift supply, and for 2011 it is expected to rise 3.4%, to 689.6 million ounces.

Further, as miners devote capital to develop gold and copper mines, silver mine supply should grow, as 40% of silver's mine output comes from copper and gold mining. In 2010, 77% of total silver mine production was as a by-product of gold and base metal mining. This trend should continue.

Primary silver mining has slowly increased and is the source of 23% of total silver mine supply, up from 19% in 2008. The rise in part comes from the high margins for silver mining, which averaged $15.15 per ounce in 2010 versus $1.99 in 2002. The production-weighted average cash cost of 30 primary silver-producing mines in 2010 was $5.16, CPM Group said.

Secondary silver supplies now account for one-third of total supplies, up from 26% in 2001. Increased demand for electronic goods has boosted demand for silver, but as older electronic goods are replaced, the silver used in them is recycled. This is expected to expand in 2011. Higher prices and greater emphasis on recycling have boosted the amount of silver recovered. The average age for electronic items in three years and recycled supply from those goods are becoming a major source of secondary supply. This is unlike solar panels, which have a lifespan of 30 to 40 years, meaning that silver is being locked up from the market – a potentially bullish factor for silver long-term.

Fabrication Demand Rises In 2010 For First Time in Three Years

Fabrication demand for silver rose 5% in 2010, to 844.8 million ounces, the first gain since 2007, but the demand is still under levels seen in the early 2000s. If the global economy continues to grow, CPM Group forecasts fabrication demand up 5.5% from 2010, to 890.9 million ounces.

Solar panel usage of silver has skyrocketed, with an estimated 64 million ounces used in 2010 up from 28.5 million ounces in 2009, and demand is likely to grow as there is an increased emphasis on "green energy." It represented the biggest increase in fabrication demand, and in 2011 is expected to rise 15.2%, to 73.7 million ounces, but remains vulnerable to government incentives.

Silver use in electronics reached a record 220.4 million ounces in 2010, up 5% from 2009, and is forecast by CPM Group to rise by 5.6% in 2011 to 232.7 million ounces. The growth comes from an increase in goods manufactured as producers are already thrifty in their precious metals use. The demand rise is most marked in developing countries, but the growth is universal, CPM Group said.

Jewelry and silverware use rose 0.1% over 2009, to 276.8 million ounces, and accounted for 32.8% of silver demand, the largest source of fabrication demand. This category is expected to rise by 5.9% in 2011, to 293.0 million ounces.

Medical use for silver has picked up in 2010, for its use as a biocide. It rose 7.7% versus 2009, to 5.6 million ounces and is projected to increase.

Not surprisingly, the biggest drop in silver demand comes from the photographic sector. The record use level was hit in 1999 at 267.2 million ounces, but by 2010, photographic use was 39% of that level, as digital photography takes the place of film and paper.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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