No Slowdown In Silver Demand This Coming Year

December 31, 2008 | By | Reply More

Silver falls between two camps.

  • On the one hand it is a precious metal traditionally used as money as the poor relation to gold and as such is bought by investors as a hedge against inflation, a store of value and wealth preserver in chaotic economic times.

Who would argue that we are not now living through just those times that have made gold and silver attractive financial safe havens in past turbulent eras. Will silver’s year ahead live up to this tradition?

  • On the other hand, unlike gold, silver has an extensive and growing use in industrial applications.

Two of the most important are in medicine and communications.

There are few analysts that would argue against the healthcare and drug sectors of the stock market being one of the better performers in the general freefall being experienced.

New developments in communications continue to come on stream with no apparent slow down.

It would not be unreasonable to assume that there is unlikely to be significant slow down in silver demand as these two industries are less likely to be as seriously affected as others by the slowdown in global industrial activity.

Much of silver production comes as a by-product of mining for base metals such as lead and zinc.

Base metal prices have plummeted in the last six months, the result is that many mining companies are reducing or ceasing production altogether and exploration and development projects are being suspended in an effort to reign in losses.

The end result will be a reduction in silver supply throughout 2009, unlikely to be made up through recycling, to meet a demand that outstripped mining production in 2007. Another good omen for silver’s year ahead.

Although there is no shortage of mines where silver is the main product, a number are in countries that are politically questionable. Investors should be very aware of the potential problems that some of these silver mines may experience but the right picks in this excessively oversold sector could prove very profitable in the coming year.

The other factor that will bear on the silver price during 2009 is oil, via its perceived association with the gold price. As the price of oil fluctuates so gold has been expected to follow suit.

This had been the pattern for a good many months but that tie has now begun to break. Gold has stayed roughly in the $750 – $850 an ounce band since oil fell so fast and dramatically from $140 a barrel to under $40 a barrel.

The question is, will a jump in oil send gold soaring above $1000 an ounce with silver possibly outperforming gold in percentage terms?

We believe that oil will regain the $70 a barrel level before 2009 reaches mid term, may be even higher. If it stays in the $35-$50 a barrel band then gold may take longer to attain the $1000 level.

Silver is a smaller and more specialised market than gold, this is why the metal often displays greater volatility than gold. Conspiracy theorists argue that central banks find it easier to manipulate the silver price and that its movements are then reflected in the gold price that in turn helps control the value of the currency – no comment!

We are betting that silver will outperform gold in 2009 and that both will exceed the peaks reached in 2008 based on our above reasoning.

We wish all our readers a happy, healthy and profitable 2009.

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