(Kitco News) - Global investment demand for silver is likely to be near record highs in 2011, while demand in value terms is likely to hit $10 billion for the first time, Thomson Reuters GFMS reported Thursday.

The consultancy’s findings were in the report “The Silver Investment Market—An Update,” commissioned by The Silver Institute.  The report updated the findings of a similar study done by the consultancy in early 2009.

A few years ago, precious metals initially fell on an unwinding of positions to meet margin calls in other assets in the wake of the Lehman Brothers collapse of 2008, Thomson Reuters GFMS said. However, this was short-lived and silver investment subsequently rose during the second half of 2009 to a then-record high.

Silver investment continued to strengthen to a fresh high in 2010 of 296.2 million ounces, or roughly $6 billion of net demand, Thomson Reuters GFMS said. Investment accounted for 29% of total silver demand that year. This was well up from 2007, prior to the Lehman collapse, when silver investment was 6% of total demand and stood at 57.2 million ounces, or approximately $800 million.

The report said 2011 world investment demand is expected be “a near record high total” in volume terms.

“A strong first and final quarter performance should be only marginally offset by a subdued outcome during the middle six months,” the report said. “However, investors’ commitment in value terms will post a fresh record total, with world investment…likely to reach $10 billion on a net basis for the first time.”

Thomson Reuters GFMS said there was a significant amount of unwinding of positions by institutional investors in the first half of 2011, then a fall toward the end of September to around $26 an ounce. As fears of a double-digit recession grew, silver “assumed its industrial mantle” and followed platinum group metals lower, the report said.

“In spite of these developments, a number of factors remain supportive of silver investment demand, both for the remainder of 2011, as well as into 2012,” the report said. “First, the outlook for silver prices remains bullish, with the potential of prices nearing, if not exceeding…$40, a realistic prospect as the fourth quarter develops. This is in part based on our forecast for gold to target the $1,900 level.”

Both gold and silver are continuing to benefit from their safe-haven credentials, with little sign of European sovereign-debt issues easing, the report said, but adding that U.S. dollar strength against the euro could limit the upside. However, the consultancy also said, should silver exceed $40 an ounce, “some unwinding may occur, principally of institutional positions, given their focus on upside price potential.”

The report described prospects for bullion coin and small bar demand as favorable not only in Western markets but in India and China. European retail demand is currently forecast to grow by around 10% this year to
over 55 million ounces, the report said. U.S. demand may post more modest growth rate, currently listed as 7%, although the forecast total of over 63 million ounces would still represent a record high, the report said.

This demand from India and China are expected to post “far more significant” gains in 2011, said Thomson Reuters GFMS. Current estimates point to Indian physical investment exceeding 45 million ounces this year, compared with around 29 million in 2010. Chinese small bar and coin demand is forecast to grow by 25% to over 8 million ounces.

The report notes that exchange-traded funds have become a significant part of the market in recent years. ETFs trade like a stock but track the price of the commodity, with metal put into vaults to back the shares, thereby affecting the supply/demand balance. In particular, ETFs lead to increased participation in the silver market by retail and high-net-worth investors, the report said.

The first silver ETF was introduced in 2006, but by the end of 2010, global ETFs had absorbed 600.3 million ounces of silver, Thomson Reuters GFMS reported. This peaked at 621 million ounces in April. The total has slipped since but still stood at 577 million ounces as of the end of October, Thomson Reuters GFMS reported.

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

 

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