Silver broke through the $30 per ounce barrier once more this week, pushing closer to a 30-year high, with the metal looking set to end 2010 on a high note.
Silver has had a superb year, rising 74% over the previous twelve months. This makes it the second-best performing metal, just behind palladium (which doubled) but ahead of gold, which gained only 27%. The spike in silver prices has been driven by renewed eurozone debt worries, and has pushed the gold-silver ratio to a four-year low of 46.6. Investors have returned to the perceived safety of physical commodities. In response to rising prices and concerns about diminishing supply, miners have begun to re-open old sites that had been closed when low silver prices had made them uneconomical.
An example of this is found in Idaho’s so-called ‘Silver Valley’, one of the world’s most productive areas for silver mining. The Valley’s Crescent mine was closed over twelve years ago, when the silver price dropped from $6 to $5 an ounce. Higher prices mean that it is feasible to re-open the mine and recommence production. A Bloomberg survey of analysts, investors and traders reported that expectations of a further rise to $40 per ounce were widespread, as continued industrial growth in China fuels demand for silver as an industrial component. GFMS, a precious metals consultancy, expects investment of $4.5 billion by investors during 2011, several times higher than the $1.1 invested so far in 2011.
The point is underscored by BNP Paribas, who has said that the silver price, along with other commodities, has been driven by investors jumping into the market, eager to ride the commodities rally. Concerns about excess silver supply do remain, and will likely strengthen given that production at old mines is being restarted. Barclays Capital cautioned that a surplus of 6.4 million ounces will occur in 2010, putting a brake on further gains in the silver price. The surplus will be 16% smaller than that for 2009, but remains above the level of previous years. Looking into the New Year, silver may continue to gain throughout January, according to past analysis of seasonality for the metal. This may likely be enhanced this year, as investors survey the landscape ahead and conclude that US quantitative easing and the European debt crisis make it prudent to put more funds into physical assets such as silver.