COMMENTARY — Silver inventories could fall

The silver market in 1996 was much tighter than expected. A rise in mine production was offset by declining supply from government sales. As a result, the total supply of newly refined silver in the market rose only 4.6 million oz., or 0.9%, to 521.7 million oz. Fabrication demand rose 3.8% to 719.5 million oz.

The shortfall of new silver supplies relative to fabrication demand expanded to 197.8 million oz. in 1996 from 176 million oz. in 1995 as a result of these supply and demand trends. Low investment demand and continued sales from above-ground inventories, as well as short-selling on the futures market, kept silver prices low last year.

Silver consumption rose (as supplies shrunk) as a result of a 13.9% increase in Indian demand to 109.9 million oz., and a 7.7% rise in U.S. silver use to 146.7 million oz.

In Japan, the second-largest consumer of silver, demand rose a mere 0.9%, to 123.4 million oz. The increased use of silver was not universal last year, as demand in Italy — the fourth-largest consumer behind the U.S., Japan and India — fell 5.8% to 61.5 million oz.

In 1997, total supply will rise 9.4% to 570.6 million oz., the second-highest level of annual supply in history. That figure is exceeded only by the 586.5 million oz. recorded in 1980, when the rise of silver prices to $50 per oz.

prompted a massive sell-off of silver jewelry, sterlingware and old coins, which, in turn, boosted supply and led to surplus problems.

The expected increase in supply in 1997 reflects rising mine production, both at primary and byproduct operations. Scrap recovery will be relatively stable, rising around 5.6% to 157.2 million oz. Another 13.4 million oz. are expected to enter the market this year from government disposals, the use of government stocks in bullion coins, and in net exports from the transitional economies of Eastern Europe and Asia.

Fabrication demand is expected to rise 2.8% to 739.4 million oz. The use of silver in photographic products in 1997 is expected to rise 3.2% to 237.4 million oz.

Silver use in jewelry and silverware is projected to rise 3% to 262.7 million oz. in 1997 from 255 million oz. last year. Indian use, especially in decorative objects and gift items, was up last year as was such demand in the U.S., Japan and Thailand. However, demand was weak in Italy, Germany and several other European countries.

The silver market balance — that is, supply less demand — has been in deficit for seven years following 11 years of large surpluses. This deficit is projected to continue into 1997, though increased mine production should offset the shortfall to 168.8 million oz. from 197.8 million oz. in 1996.

How much silver remains in inventories is a critical question facing the market. The key to understanding that market is the massive amount of the white metal that existed before 1990, a supply that is slowly being diminished. As long as ample inventories exist, however, the effect, on silver prices, of the shortfall of supply relative to demand will remain muted.

The shortfall over the past seven years has been compensated for by diminishing bullion inventories. From 1979 to 1989, a surplus of 712.2 million oz. of new supply in excess of demand entered the market. That figure was added to already existing silver bullion or coin stocks. An estimated 800 million oz. silver existed in bullion and coin form in 1979. By 1989, that figure had risen to around 1.5 billion oz.

Since then, these stocks have been winnowing and, in 1996, totalled 452.8 million oz. in bullion form and 369 million oz. in coin form. The secrecy that shrouds information on unreported silver inventories means that these estimates must be regarded with caution. Regardless of the actual inventories, however, it is clear that worldwide bullion inventories are at their lowest levels in more than 46 years, and seem likely to fall further in 1997.

— The preceding is from “Silver Survey 1997,” a publication of New York-based commodities research firm CPM Group.