LBMA Precious Metals Conference Montreal, September Silver Investment. Philip Newman Research Director, Thomson Reuters GFMS

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1 Silver Investment Philip Newman Research Director, Thomson Reuters GFMS As Mike has mentioned, I am going to talk about silver investment, asking the question, Is silver investment the new rich man s strategy? Some of the conclusions that I will be referring to are from a report that we are preparing for the Silver Institute, which will be made available in due course. Motives for Investing in Silver But to really answer that question I am going to address the topic in three areas. First of all, what are the motives for investing in silver, and how have these evolved in recent years, and principally since the collapse of Lehman Brothers in Once we understand those motives, and have broken it down by the key investment groups, we then look at the evidence for that investment, the short-term history, but also focusing very much on I will finish with a few comments on the short-term outlook. We have benchmarked gold and silver prices from the beginning of On this basis, this suggests that silver prices have comfortably outperformed gold. Indeed the statistics appear to bear this out. We look at the intra-year performance from the beginning of January through to the end of August 2011, silver rising by almost 80%; compared with gold rising by just around 30%. However, as we will see later, that is not always the case, particularly if we drill down to the market in Many of the key motives for investing in silver have been addressed at some length already in the conference, but just to break them down. Let s focus on the fundamentals. What we will see shortly is that the price strength has been quite broad-based, with silver investment accounting for about a third of global silver demand. Silver s safe haven role has been well documented over the past day and a half. The ongoing sovereign debt crisis, the risks of a double dip recession and so on and so forth. Silver s price characteristics can be attractive or otherwise to silver investors depending on their attitude, whether it is from a short-term perspective or from a buy and hold mentality. The messages from silver s fundamentals can be quite mixed for the investor. The supply from mine production and scrap over an 11-year period through to our current forecast for 2011 has risen by 1

2 around 200 million ounces, from around the 800 million ounce mark in 2001 to approximately 1 billion ounces this year. Comparing this with fabrication demand (excluding coins which we include in investment) may at first appear bearish, given that there has been little change over the period from 2001 to However, we think this actually presents a bullish picture, for two reasons. Firstly, if you look at the recent history, 2009 saw the largest drop in our demand series, which goes back to That was followed a year later by the largest one year increase, which gives you an idea of the resilience of silver fabrication demand. The other point to note is the trend in silver prices. Back in 2001 prices averaged at about $4.50 an ounce. Compare that with 2011, and we have an almost nine-fold increase in prices over that time period. That is quite an impressive outcome. The final point to note in terms of the fundamentals is that the market has moved from a deficit, which actually existed over much of the 1990s, to a surplus, which has gradually been growing in recent years. That surplus has had to be absorbed by investment. As I mentioned earlier, silver investment now accounts for almost 30% of total silver demand. In the context of the silver market that is quite high, but it is much lower than we have seen recently for gold, where the share is almost 40%. So whereas for the yellow metal the price strength is very much dependent on what is happening in investment, for silver it is a different issue, it is much more broadbased. Safe Haven Role I want to give you a sense of how silver prices have performed compared to a select number of broadbased stock indices, which are measuring the performance in Europe and in the US as well. From a safe haven perspective, we can look at the motives for private investors and also high net worth participants; not so much the institutional, which has much more of a speculative element. For private and high net worth investors the focus is very much on asset diversification and wealth preservation. Upside silver price potential is not at the forefront of their thinking. That contrasts with the institutional space, where speculation and upside price potential very much come to the fore. In that regard, silver s price volatility is a very attractive characteristic, although things got a little out of hand earlier this year with the volatility in silver around the April/May period. I will return to that theme later. 2

3 Price Expectations Another issue for the market that has driven silver investment both in the western market and also in the key non-western areas of China and India, is price expectations. Taking annual average prices in real terms we get an indication that expectations were that prices would move higher. That was a function of the market very much earlier this year as well. If we consider the performance of silver against gold from the beginning of 2005, the indications are that silver had comfortably outperformed gold. However, in the more recent period, things look rather different. From the end of 2010, we saw a dramatic increase in silver prices, which accelerated through to the end of April At that point though, some investors booked profits and the rally ran out of steam. The sharp decline that ensued acted as a significant deterrent to many investors. Yes, they were attracted by volatility, but the volatility and the sharp decline was almost too extreme. From early May until mid September silver prices have underperformed gold in That gives you a sense of the fact that the investor monies have been much more hesitant over that period, principally compared to early 2011 as well as Bearing that all in mind, what indications are there to confirm, or otherwise, investment coming into the silver market? I will look at trends in western and non-western markets to assess any developments that may have emerged in this area. Although for the non-western trends I have mentioned India, because of a shortness of time we will focus on China. 3

4 COMEX Taking the net long positions on the COMEX for silver, if we drill down to the early 2011 period we can see how some of those positions have been rebuilt, but it has been very tentative, from a very low base. It pales in comparison against the net longs that we saw in the early- to mid-2000s. Having said that, if we were to look at the value of these positions we would see that even though they appear to be at a low level in volume terms in 2011 to date, from a value perspective it is much more significant, and it comfortably outstrips the average value of the mid-2000s. In other words, the commitment of investors is still quite significant from a dollar perspective. ETFs 4

5 With ETFs there has been little if any sign of strong demand in 2011, given that to the end of August we have had a selloff of just over a million ounces. It is interesting that that sell off has been quite restrained, which indicates how sticky these holdings have been. That is partly contingent on the fact that we have had, or we continue to have, historically low interest rates. Drilling down to the retail investors, US Silver Eagle sales from the US Mint, the mintage has accelerated from 2009 through to the present date. That ties into the sovereign debt crisis. Using data from the US mint and other leading mints around the world, we conduct a quarterly bullion coin survey. This gives an indication of how important Europe has become against North America. 5

6 There has been a very strong bullion coin demand, but we have seen a degree of price sensitivity on behalf of retail investors who have, in some cases, moved out of the 100 ounce bar market in favour of Eagles, one-ounce rounds and smaller bars. So even though some investors are still favouring silver, perhaps they have been priced out of the gold market, they believe in the silver market, or they are looking to leverage on the gold market as well. Within that mix we are still seeing price sensitivity. In terms of the evidence we have seen this year, and considering what has been happening in China, the total monthly turnover on the Shanghai Gold Exchange, there has been an impact of those very strong price expectations earlier this year. There are two common factors for driving this; one is price expectations, but also it is the fact of the very high levels or the growing fears and the concerns about Chinese inflation. In the context of the small bar and coins, the market was only liberalised in 2009, so the numbers can be a bit misleading. However, the 2011 total may be a fair reflection of the market given that demand was much stronger earlier in the year, and in keeping with many of the western markets there has been a reticence to return to the market after the price decline. However, the data for August from the SGE give a sense of how those positions have been rebuilt. They are far lower than they were earlier in the year, but compared to the beginning of 2011, end of 2010 they are still quite respectable. So what does all that tell us about the market? It has been the case that since the collapse of Lehman s the retail and the high net worth investors have absolutely been galvanised. Until the beginning of this year we saw very strong speculative flows of money coming into the market. That carried on very much until early 2011, particularly towards the end of April. The factors very much were in place that really confirmed that silver was the rich man s new strategy. We had a narrowing gold/silver ratio. The silver market was less liquid than we see in gold, and there were a whole host of other factors driving investors into the market. OTC Market For example, in terms of the OTC we saw a large rise in allocated metal accounts as well. That categorically changed from May onwards. We saw a significant hesitation on the part of investors. However, silver is very much regarded as a hard asset. The outlook for demand is still fairly robust, and even if we do have a double dip recession, we are not expecting fabrication demand to fall as extensively as we saw back in

7 Summary I will now turn to a summary of where we see silver investment demand this year. From a volume perspective we expect it be marginally down on 2010, but that should not really detract from the fact that it is still is at a historically high level. It is the second highest total in Thomson Reuters GFMS s series. More importantly, the commitment of investors from a value or dollar perspective, from fairly modest totals back in 2009/2010, which were themselves record highs of around $6 billion, we are looking for an investment demand this year, in value terms, to set a new record high of just over $10 billion. It does suggest that silver could indeed still be the rich man s new strategy. Thank you. 7