Mixed signal from global pundits

IN FOCUS/ Silver

Silver is likely to shadow gold in 2005 with prices expected to average above $6.5 despite weak fundamentals, on the back of strong gold and base metal prices, higher investor interest and a weaker dollar.

Forecast 2005, published by the London Bullion Market Association offering views from top global bullion analysts, has predicted that silver would average over $6.5 a troy ounce.

Silver's average price in the first week of January 2005 was at $6.5, compared with $6.25 in the corresponding period last year. The year-on-year consensus average is up 56 cents.

The middling price of the averages provided by 20 analysts for the year is $6.56.

Silver's fundamentals are poor, with fabrication demand outlook weak, coupled with downturn in global industrial production growth.

Photographic use is falling and jewellery and silverware demand is stagnant, Philip Klapwijk of GFMS London, said.

However speculative demand is expected to offset these negatives.

David Holmes of Royal Bank of Canada, London, said silver will continue to trade shadowing gold and base metals rather than its own fundamentals.

He expects 2005 prices to be 5 per cent higher than 2004.

"The long-term fundamental picture for silver is not good with increased reliance on digital photography and reduced physical demand from India. But despite negative fundamentals, we still feel the 2005 average will be higher due to a weak dollar and more broad-based investor interest in commodities," he said.

Tom Butler of London's Virtual Metals said silver is likely to attract speculators as it is the "penny stock" of the precious metals family.

A sharp rise in zinc prices is likely to encourage new mines, mine expansions and restarts, which will also raise silver as a by-product significantly.

"On a balance, silver will still have a positive 2005 and lead and zinc industry developments will only impact in 2006," he said.Others however, urge caution.

Bhargava Vaidya of B N Vaidya & Associates, Mumbai, said, "Silver will remain volatile and its tracking of gold will keep it above $6. The relationship of silver with base metals will add to the price volatility."

Supply of silver as a by-product will cap upward movement and keep the demand-supply equation balanced.

Kamal Naqvi of Barclays Capital, London, said, "We expect silver to be firm into 2005, but then fall towards $6 by the end of 2005."

He said interest of investors in silver is based largely on its role as an alternative to gold.

John Reade of London's UBS Investment Bank warns 2005 should see silver dragged down by falling base metals prices and rising supply.