Silver Shares Still Offer an Excellent Buying Opportunity
SILVER: FOLLOW-UP NO 14 /April 15, 2005
Silverinstitute
On August 9, 2004,
with the silver price at $ 6.52, we wrote: “We believe that the support around $ 6 has well proven its capacity to absorb any strong selling pressure and we believe therefore that the time to buy silver and silver shares is still propitious.” We added, “The prices of silver shares will advance very quickly, once confidence returns to the market.”
So let’s now examine what has happened since and where we stand at present and what the future may bring:
The long-term picture of the silver price
[Blockierte Grafik: http://goldseek.com/news/Zihlm…/images/2005/4-15zi/1.PNG]
What we notice is that the silver price, after having moved higher during the month of August, suddenly came down at the beginning of September. Nevertheless, selling dried up when the price fell below $ 6.25, fulfilling our prediction that the $ 6 level would be able to absorb any selling pressure. From September to the beginning of December, the silver price moved up sharply to again reach the $ 8 level, which had already been tested in April of the same year.
The silver price then fell back into its long-term up-trend channel where at present a new support-level between $ 6.50 and $ 7 should be able to absorb any further selling.
Considering the strong and intact up-trend, it appears that the price of silver is preparing itself for the next attack on the $ 8-resistance level which we believe could well give way this time.
The medium-term picture of the silver price
[Blockierte Grafik: http://goldseek.com/news/Zihlm…/images/2005/4-15zi/2.PNG]
The medium-term picture also shows that the price of silver remains in a solid up-trend in which excesses are nevertheless quickly corrected. While the astute trader may try to benefit from the high volatility of the silver price, those who believe that silver will go substantially higher over the long-term can simply buy whenever the silver price falls below the 200-days Exponential Moving Average (EMA).
The short-term picture of the silver price
[Blockierte Grafik: http://goldseek.com/news/Zihlm…/images/2005/4-15zi/3.PNG]
We expect the silver price to hold above $ 6.75 and to push towards the $ 8-level and possibly higher, although it will be occurring at an unspecified time in the future.
Our favourite silver shares
[Blockierte Grafik: http://goldseek.com/news/Zihlm…/images/2005/4-15zi/4.PNG]
(%-value changes reflect the performance since our first recommendation.)
Fundamental Considerations: THE RISING SILVER DEMAND
Supply versus Demand
[Blockierte Grafik: http://goldseek.com/news/Zihlm…/images/2005/4-15zi/5.PNG]
In 2003, silver demand exceeded supply by approximately 34 million ounces. This is the fifteenth consecutive year of supply deficit. Over this period, nearly 1.8 billion ounces of silver have been drawn from reported and undisclosed inventories to make up the shortfall.
This consistent supply deficit is a characteristic unique to silver and one that reinforces our own belief in higher silver prices over time. Although silver consumption and this deficit vary from year to year reflecting global economic conditions, the important point is that the market was again in deficit in 2003 and is projected to be in deficit in 2004. The data incorporated in the following discussion on silver is based on research from the CPM Group of New York. (New estimates for 2005 are not available yet.)
Demand - Factors and Trends
Silver demand in the first part of 2003 saw a reduction in industrial use worldwide. This factor, along with renewed interest in physical silver, shifted in a positive way in the second half of 2003 that continues into 2004.
Total demand declined 3.0% in 2003 to 761 million ounces of silver, with the decline more heavily weighted in the first half of the year. Photographic demand declined marginally to 249 million ounces in 2003, and jewelry and silverware consumed 261 million ounces. This is a combined reduction of 17 million ounces from 2002.
In early 2003, SARS in China significantly reduced travel in the country and related consumer photography. Digital cameras have made some inroads but increasing photographic use in x-rays and disposable cameras, and further growth in China and Asia, will continue to mute the digital influence. Photographic demand is expected to remain constant in 2004.
Demand remained strong for jewelry and silverware in Italy, Japan and the United States. Electronic demand last year was 104 million ounces, down slightly from the previous year due to the downturn in the electronics industries, specifically computers and cellular phones. Demand is reported to be sharply higher in the first quarter of 2004.
Other uses consumed about 140 million ounces as solders, bearings, chemical catalysts used to make the basic feedstock for polyethylene, mirrors, medicines, dental alloys, and other applications. Another 10 million ounces of silver were used in the making of silver bullion coins, which investors buy. These are counted separately from fabricated products, since they are 'bullion-like' and purchased for their silver content.
In the past, growing physical demand was keyed to improving industrial demand. Among potentially significant newer industrial applications, silver is now being used in superconductors in which silver coats the core wire. This silver sheath increases the efficiency of the superconductive wire, reducing the loss of power during transmission. There is evidence that use of superconductive wire grew more rapidly than expected in 2003 and further growth is anticipated in 2004. Use of silver in medical and health niche applications, such as band-aids, products to promote healing from skin burns, water purifiers and surgical instruments, continues to grow.
Supply
Overall supply in 2003 totalled approximately 727 million ounces. The largest component of supply was mine production at some 480 million ounces -- down 3.2% from the 496 million ounces mined in 2002. Lower mine supply reflected reduced production from copper, lead, zinc and gold mines, which accounts for about 75% of mine supply of silver. With higher commodity prices in late 2003, mine production is expected to return to 2002 levels of 494 million ounces.
Secondary supply, which is largely scrap, comes from photographic recycling, silver coinage, and jewellery. These supplies totalled about 217 million ounces in 2003, up almost 10% from 2002. The 34 million-ounce deficit between supply and demand in 2003 was made up by silver sold from undisclosed inventories.
Overall Trends
Looking at 2004, CPM Group of New York, which undertakes research on silver and is supported in part by Silver Standard, is expecting that demand for silver will increase by 2.8% to 780 million ounces. The total supply of silver is expected to grow 1.2% to 736 million ounces, resulting in a deficit estimated at 46 million ounces. The assumptions behind these numbers are based on some tangible evidence: industrial expansion in the United States, Japan and China.
At the same time, according to CPM Group, holders of undisclosed silver inventories appear to be reducing sales that balanced supply and demand in recent years. This is partly due to a change in investor psychology. Investors are anticipating inflation and acquiring holdings of silver for investment purposes. Volumes for silver equities, and options and futures contracts are now noticeably higher than 2002.
CPM Group noted two interesting trends in the silver and paper markets since 2001. First, the volumes of silver futures and options being traded on organized exchanges have risen by 50%. Second, the volume of silver traded through the London-centred international bullion banking market has fallen by 70%. Futures and options volumes were as low as 15.9 billion ounces in 2001, but increased to 23.9 billion ounces in 2003. Meanwhile, the amount of silver cleared across London bullion clearing banks fell from 74.6 billion ounces in 1997 to 21.9 billion ounces in 2002, before recovering to 23.5 billion ounces in 2003.
CPM Group commented that "the drop in London bullion clearing volumes reflects the decline in proprietary trading in silver by banks and brokerage companies over the past six years, while the rise in futures and options activities reflects the increase in investor interest in silver, both on the part of large institutional investors and individual investors. Similarly contrasting trends have been seen in the volumes of gold cleared through London banks and gold futures and options trading, but the contrast in gold is not as stark as it is in silver." Volumes in both bullion and paper markets have increased in excess of 40% on an annualized basis so far in 2004 compared to 2003.
[Blockierte Grafik: http://goldseek.com/news/Zihlm…/images/2005/4-15zi/6.PNG]
The following recommendations were valid at the time of writing, viz. at
and may no longer be valid at the time of reading.
Our recommendations for SILVER: USD 6.97/ounce
Long-term (several months)
BUY
Medium-term (several weeks)
BUY
The assets of THE TIMELESS PRECIOUS METAL FUND, Malta (EU), are invested in silver shares up to 30%.
Peter Zihlmann
http://www.pzim.com
http://www.timeless-gold.com
Contact: investment@pzim.com
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Disclaimer: P. ZIHLMANN INVESTMENT MANAGEMENT AG does not accept any liability for any loss or damage whatsoever, that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in the trading recommendations or in any accompanying chart analyses, whether communicated by word, or message, typed or spoken by any of its employees.
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-- Posted 15 April, 2005
