21 October 2010, 10:57 a.m.
By Allen Sykora
Of Kitco News
(Kitco News) -Mining company executives like silver’s future prospects due to the combination of investment and industrial demand, with some also expressing optimism about the gray metal’s future performance relative to gold.
Several shared their views with Kitco News this week ahead of and during the annual Silver Summit that has brought together investors, analysts, dealers and mining companies in Spokane, Wash.
“We think the future for silver looks quite encouraging,” said Thomas Parker, president and chief executive officer of U.S. Silver Corp., and also chairman of the Silver Summit. Like others, he cited silver’s dual role as an industrial and precious metal.
Silver prices were on the defensive Thursday as he spoke. “But when it has risen as rapidly as it has, I think it’s normal to have a pullback,” Parker said.
One of the noticeable trends within the industry in recent years, Parker said, is the increasing variety of industrial applications and rising use in the medical field due to silver’s anti-bacterial properties. This, and the advent of exchange-traded funds, has helped silver shake off the decline in demand from the photographic industry during the shift to digital-camera technology.
“Silver has not yet hit its all-time nominal highs from 1980…So we think the potential for silver to move significantly higher still remains,” said Greg Johnson, president and chief executive officer of South American Silver Corp. Many other metals, such as gold and copper, already have hit their all-time highs in recent years, he said.
Johnson said, there have been limited large silver discoveries in recent years, and this in turn means limited potential for companies to ramp up output in response to higher prices. “It takes typically 10 or 15 years or more for a big mine to go from discovery to actual production,” Johnson said. “So there is likely to be a lag, even if prices were to move significantly higher.”
Furthermore, Parker pointed out, most of the world’s silver is a by-product of mining for other types of metals. Therefore, changes in production of silver are not always directly tied to the selling price of silver itself.
Gold tends to get the most attention in the precious-metals arena, but in the weeks leading up to the Silver Summit, silver outperformed the yellow metal.
“The benefit of silver versus gold is the hybrid nature of it, having more industrial uses,” said Lorne Waldman, corporate secretary for Vancouver-based Silvercorp Metals Inc., China’s largest primary silver producer.
At the moment, both metals are being driven higher by investment demand as an alternative currency, he said. “But there can be times when there isn’t that huge currency demand,” Waldman said. “At least with silver, you have the strong industrial demand. That provides more of a base of long-term support. When you have both investment demand and industrial demand happening at the same time, you have greater upside potential.”
In the longer term, silver’s industrial demand may help the metal hold up better on downward moves for gold and silver, some suggested.
Prior to the recession, the collective industrial demand for silver was rising some 6% annually, said Phillips S. Baker Jr., president and chief executive officer of Hecla Mining Co. “We think it’s going to get back to that,” he said. “And because of the urbanization that is occurring in China, India and other developing countries, we think that growth rate will actually increase. “
Historically, Baker pointed out, silver has been known as a more volatile metal than gold. Being a smaller market, smaller orders can have a greater impact than in gold.
“I think over time, it will lose the downside volatility because of the physical demand for silver,” Baker said. “We’re not there yet, but that’s coming.”
When the 2008 financial crisis hit, silver fared worse than gold, Waldman said. But that was when industrial demand fell off sharply at a time of economic weakness in many Western nations.
Some executives suggested the gold/silver ratio could continue its recent decline. This ratio is calculated by dividing the price of an ounce of gold by the price of an ounce of silver, with a lower number reflecting a stronger showing by silver relative to gold. Historically, the gold/silver ratio has been mostly in a range of around 20 to 1 on the low end to around 80 to 1 on the high end, Johnson said.
Waldman suggested the ratio could fall to 50 to 1. It was around 57 early Friday.
“I don’t see any reason why at some point we couldn’t have 15 or 20 to 1,” Johnson said, although adding this may be some time down the road.
Meanwhile, Waldman reported that as Silvercorp mines in China, company representatives are noticing an increase in demand from Chinese investors. The precious metal has become more available as the government moves to encourage such investment, he explained.
“If you go back three years, the average Chinese person couldn’t buy silver as an investment,” Waldman said. “Now, they can…We’ve sent our staff into stores to actually witness (this). Yes, people are buying as an investment. You read about it anecdotally. I think it bodes well for the entire industry to have a market like China all of a sudden look at silver as a new investment opportunity.”
By Allen Sykora of Kitco News
