Interviewer: Geoff Candy
Tuesday, November 23, 2010
www.mineweb.com

GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Metals Weekly podcast. Joining me on the line is the executive chairman of GFMS, Philip Klapwijk. Philip you presented your interim silver market review at last weeks annual New York silver dinner and one of the of the highlights was of course the prediction that silver prices could reach higher than $30/oz over the course of next year. Perhaps we can start with the reasons behind that, and then move into what's been going on with the market at the moment. PHILIP KLAPWIJK: We think this is likely to happen because we will see a continued wave of domestic demand coming into the market. If we look at calendar 2010 there has been a significant lift in investment in silver - it's possible that silver investment this year on a net basis may reach close to US$4 billion in size and it's probable that next year we will see a higher figure and a larger scale of investment from both institutional and private investment sources.

GEOFF CANDY: What's the geographic spread of that investment demand?

PHILIP KLAPWIJK: If we look at this investment demand that's coming into silver, most of it is taking place in western markets, it's taking place in the form of ETFs, futures market investments and also quite a substantial amount of over-the-counter market investment - some of it in physical metal and our supposition is that the majority of this investment is probably taking place from western funds or western private investors although there may be some investment from outside Europe and North America that is being made in vehicles that are listed in western markets such as New York or London, or taking place via local London over-the-counter market.

GEOFF CANDY: If we look at the demand side of silver, clearly photography as an industrial use is declining, but there are other industrial uses coming up and I've heard comments from various silver commentators saying that perhaps silver is becoming almost a better proxy for economic growth than perhaps copper was a while ago because it's being used in more modern, if you will, industrial processes. Would you go along with that?

PHILIP KLAPWIJK: Not entirely - if you look at silver's end uses around about 46% this year is going to be in the form of industrial uses, broadly described. So it's a bit less than half or close to half, shall we say - but a significant amount of silver is going into investment close to a quarter. So compared to say copper it's still less of a pure industrial metal. In fact it's still got something of a monetary characteristic about it - not as much as gold has certainly, but silver is still for many people considered a quasi financial asset and that does distinguish it from the likes of copper.

GEOFF CANDY: Coming back to investment demand, have you seen an uptick now given the concerns of the Eurozone particularly with the likes of Ireland getting a bank bailout. We saw quite a significant uptick the last time that kind of debt crisis raised its head - are you seeing a similar sort of pattern now or is that sort of thing now priced into the investment side of things?

PHILIP KLAPWIJK: Well I don't think it's fully priced and that probably explains the robustness of silver and indeed gold prices lately. Clearly this is also to some extent dollar related. When we've seen the dollar for example recently, appreciate against the euro that has led to some downside to silver prices, but it's interesting to see how silver really has held up remarkably well in recent sessions, notwithstanding a significant move higher in the US Dollar against the euro and that's pretty encouraging in terms of its prospects next year because what it seems to suggest is that even during periods of US Dollar appreciation, silver and indeed gold might do reasonably well because of the reasons why the dollar might be appreciating under those circumstances - in this case of course the fact that there's a sovereign debt crisis which is getting into a new hot phase in Europe.

GEOFF CANDY: How important is the silver-gold ratio at the moment - it's quite a lot lower than its 10 year average at the moment - how important is it when you look at the silver price?

PHILIP KLAPWIJK: It's important when you get to extremes - I would say that once you're in - should we say more conventional type of range which is around about the 60 market typically - it's difficult to see whether this really gives you any signals regarding over or under valuation of silver relative to gold. But when you've been as extreme as say above 70 on the one hand or perhaps below 50 which is where we are currently trading at the present time, it does suggest that silver is relatively expensive compared to gold, although some would argue that the real measure should be longer term - the very longer term ones which are pointing more to a sort of 15-1 ratio - that's actually not a view I would have too much sympathy with because the world has changed very dramatically since the time when silver really was a pure monetary metal - and we have to look much more at the more recent history which over the last decade or so or even if we go back 20 years, is suggestive more of a ratio closer to the 60-1 mark.

GEOFF CANDY: In terms of other aspects of demand, you spoke about the monetary side of things - in terms of silver coins there was a slight uptick from 2009 to 2010. Do you think that's likely to continue?

PHILIP KLAPWIJK: I believe we're likely to see an increase in silver coin demand next year, given our expectation that there will be increased investor interest in silver, and some of this is certainly going to manifest itself in higher sales of bullion coin products, which recently have been going at a fair clip.

GEOFF CANDY: Just in terms of the Asian region, clearly gold is a big important metal there - particularly for jewellery demand and investment as well - are we seeing, as gold prices have risen, a move towards silver because of its relative cheapness?

PHILIP KLAPWIJK: If you look at the Asian markets in contrast to western markets as such is Europe and the United States but there has been a moderate degree of defection away from carat gold to sterling silver but this really is at the margin and it really has only affected the smaller part of the gold jewellery market in the region which is 18 carat gold for example - it hasn't affected the high carat gold jewellery market in the likes of India and China where we're looking at 22 and 24 carat product which I don't think has seen any price-led move to silver. Now if we look at silver investment demand, there has been some greater interest both in India and in China in silver bullion products where we have seen quite an interesting level of investor interest in both countries in silver bars, but that has not been at the expense of gold investment - that has been a parallel investment and to some extent you can argue has been influenced at the margin by higher levels of gold bar investment in those regions.

GEOFF CANDY: Just two questions to close off with - firstly on the supply side, as a negative - you say that we are seeing a continuation of mine production and we're almost reaching a large market surplus - how does that play out in 2011, do you think?

PHILIP KLAPWIJK: Yes there is clearly a significant contract between what's happened in gold mine production over the last decade where in spite of some of increases we're seeing this year and probably next, we will still fall a little short of the 2001 peak in production and this is after a 10 year gold bull market has seen prices increase more than five-fold - from the lows that is. If we look at silver in contrast, silver mine production has actually grown by not far short of 130 million ounces between 2001 and 2010 and the prospect is for further increases in mine production. Now at the moment that extra silver is being absorbed without a problem. Investors are quite willing to buy it seems, larger amounts of silver at higher prices, but it is swelling the surplus that has to be taken off the market by investors and the question one has to ask therefore is what happens if and when prices head south because of changing external circumstances which mean that silver investment is ... I imagine that that would indeed provoke that type of fall in prices in order to allow the market to clear.

GEOFF CANDY: Do you think that's likely to happen next year or is there any way to gauge what sort of time scale?