Silver could fly

[Paciente]

Silver could fly if China stops selling
By WENDY STUECK
January 08, 2005

VANCOUVER -- It might be known as poor man's gold, but silver outpaced its more expensive cousin last year and analysts and producers say it has bright prospects for 2005.

One of the biggest factors behind that optimistic view is China, which has been selling excess silver -- amassed during decades when the only buyer for the country's mined silver output was the People's Bank of China -- on the open market, unloading millions of ounces a year each year since 1999.

But the amount sold each year has been gradually declining and there is now speculation that the Chinese stockpile may be gone.

"In the last five years, we reckon China has sold close to 300 million ounces of silver on the world market," says Ross Beaty, chairman of Vancouver-based Pan American Silver Corp. "The absolute amount of that stockpile is not known. But we know it is seriously depleted and we think it may be completely depleted."

The buzz around silver has been building for at least the past 12 months. Silver futures contracts took off early in the year, soaring to 17-year highs of more than $8 a pound in April on the Comex division of the New York Mercantile Exchange. Prices subsequently dropped, ending the year at $6.81, still substantially above the $5 mark where the metal has treaded water for most of the previous five years.

Silver closed yesterday at $6.43 on the Comex exchange.

In terms of price appreciation, silver outperformed gold last year, rising 13.6 per cent in U.S. dollar terms, compared with 4 per cent for gold, based on closing prices in London.

Over a five-year period, from 1999 to 2004, silver rose 27 per cent and gold 50 per cent.

Silver's biggest role is not as an investment but in the industrial, jewellery and silverware, and photographic sectors, which account respectively for about 40, 30 and 20 per cent of annual demand.

The photography sector, which accounted for 22 per cent of silver demand in 2003, is shifting to digital technology, which has reduced demand for silver.

But that drop, about 4.7 per cent in 2003, according to London-based consulting firm GFMS, has not been as dramatic as some had expected. And as the usage of silver in the film sector declines, it's picking up in the printing sector, as consumers seek out high-quality prints for their digital pictures.

Silver is also being used in a growing number of applications, such as anti-bacterial medical dressings.

An improving outlook for silver has companies gearing up for exploration, especially in Mexico, the world's biggest silver producer.

Vancouver-based First Majestic Resource Corp. has been snapping up silver projects in Mexico, and began producing the metal at its La Parilla mine in July.

Western Silver Corp., also based in Vancouver, announced Dec. 23 that it had wrapped up a $64.8-million (Canadian) financing to help develop its Penasquito project in Mexico.

There are relatively few pure silver plays and the handful that exist tend to trade at even loftier premiums than gold producers. The group includes Pan American, Idaho-based Coeur d'Alene Mines Corp. and Apex Silver Mines Ltd. of Denver.

Vancouver-based gold producer Wheaton River Minerals Ltd. last year announced plans to spin off its silver production into a separate company, a move that will create another pure silver play.

Silver Standard Resources Inc., also based in Vancouver, does not currently mine silver but has built up a portfolio of silver projects with an eye to profiting from the metal's future price increases.

© The Globe and Mail