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(Kitco News) - Silver bulls should have cause to celebrate once again in 2012, even though supply/demand hangovers caused by an intoxicating run to early-year record highs actually has them swallowing small losses for 2011.

Many experts predict silver prices will end 2012 at double or triple their mid-December level of around $29 an ounce, although a few bearish holdouts believe the market could lose another $10 from here.

DEMAND

"I see $60 silver by the end of 2012," said David Morgan, independent precious metals analyst with Silver-Investor.com. "Demand from investors will pick up, as we see continued deterioration of the world financial system."

HSBC Securities also foresees renewed investor interest and a 7% expansion in global demand in 2012, to an unprecedented 968 million ounces. TD Securities looks for an even greater 9% gain, to 1.021 billion ounces.

"Demand for silver will be sustained by global concerns about fiscal profligacy, political gridlock on dealing with the U.S. budget deficit, long-term sustainability of the U.S. dollar, potential inflationary consequences of highly accommodative monetary polices, and economic uncertainty," HSBC said. "Coin and small-bar demand may moderate from current high levels, but remain strong, further contributing to silver price strength."

HSBC predicts possible spikes to $40/oz "or even higher," in 2012 and a season-average price of $34/oz.

"Silver acts like a precious metal on the way up and an industrial metal on the way down," said Gijsbert Groenewegen, managing partner of Silver Arrow Capital Management in New York. "Silver will move contrary to the trend of the U.S. (dollar)."

Several analysts believe collapse of the euro is now all but inevitable; a watershed event which will send EU investors fleeing to the relative safety and liquidity of the huge U.S. bond/dollar market.

“Metals have mutated from 'safe haven' assets to 'risk' assets," said Spencer Patton, founder of Steel Vine Investments, who predicts 2012 will end with silver quoted around $18. "I expect 2012 will present some major changes in the eurozone," that will lead to weaker silver prices.

Groenewegen concurred, but warns that strength in the dollar -- and accompanying weakness in demand for silver -- may be very short-lived, however.

"The financial situation in the U.S. is not much better than the EU. If politicians fail to reduce the U.S. debt, interest rates will skyrocket and paper money will lose all credibility," potentially sending silver spiking to stratospheric levels as high as $200-400.

SUPPLY

Several leading research firms and banks expect a 1% to 6% increase in the global silver supply during 2012, as scrap redemptions accelerate and mine production grows. 

"Silver mine output has been rising notably for years. Silver prices are multiples above the costs of production," said HSBC. "The result has been an acceleration in silver output that would have been almost unimaginable, just a few years ago."

HSBC expects total world supply to exceed 1.1 billion ounces in 2012, representing a 24.4% increase over levels seen as recently as 2008.

"TDS models are suggesting that the silver market will be oversupplied this year and over the next two years, as production grows," said the Canadian-based firm, which predicts a 109 million ounce surplus for 2012.

"In the past, silver’s industrial side has generated deep corrections for the white metal and we don’t expect it will be much different this time around, with a correction to materially below $25/oz entirely possible," TDS said.

Still, Patton said that long-term supply/demand factors remain relatively positive for silver.

"Every cell phone in the world has a little bit of silver in it--and once silver is used, it is gone. We should see tremendous expansion in the handset world for the foreseeable future," he said. "Thus we are seeing an infinitely declining amount of silver on the planet...but in 2012 we may see more supply entering the market, as many silver speculators sell."

OVERVIEW

In summary, most analysts feel the strong underlying fundaments which lifted silver to new heights in 2011 have not changed, even though April's record has since been slashed by more than 40%, leaving values languishing $1.85 lower versus where 2010 ended, around $28.78/oz. 

"We are still using fiat money and (sovereign) debt levels are still extremely high. The debts have to be paid or defaulted on. Either way, that means significantly reduced economic activity world-wide," said independent analyst Hubert Moolman. "That likely also means another big stock market crash. Before this happens, it would be foolish to talk about a top in precious metals," because these conditions are precisely what will drive silver prices significantly higher.

reporters@kitco.com

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