Silver sales for industrial applications as well as for jewellery, coins, silverware and photography should climb 3 to 5 percent this year as end-users replenish inventories that ran low late last year due to an economic slowdown, said the head of Thomson Reuters GFMS, a respected metals research firm.
However, the metal's price may not test all time highs as investor buying may remain subdued and the industry struggles to absorb a substantial surplus in the market, said Philip Klapwijk, global head of analytics of the London-based firm.
"In order for us to see prices to be sustained above the $30 an ounce level, we have to see a decent level of investment interest. Investors have to be willing to buy the surplus for the price to be maintained or move higher," Klapwijk told Reuters ahead of the release of the World Silver Survey.
"What we have seen year to date is reduced appetite from investors, which have led to silver prices not really repeating the performance that we saw last year," he said.
Klapwijk said silver's price could push toward $40 in the second half of 2012, but he did not expect it to rise to a record near $50. It traded at around $31.60 an ounce on Wednesday.
Year to date, silver prices are up 13 percent after a 10 percent loss in 2011 had snapped two years of sharp gains. It hit a record of $49.51 an ounce in April 2011, followed by a more than 30 percent correction within the next week.
Hedge funds have largely liquidated their sizable bullish bets on silver and their enthusiasm for the metal has waned compared with last year before prices collapsed, Klapwijk said.
"It may re-ignite again if silver were to drop below $30, you can start to see the value-type investors coming in," he said.
Silver fabrication demand, which accounts for more than 80 percent of total demand, is expected to rise between 3 and 5 percent to around 900 million ounces in 2012, surpassing demand in 2010, Klapwijk said. Demand should climb as silver fabricators restock inventories after manufacturing activity slowed in the last quarter of 2011, he said. Silver fabrication includes industrial applications, jewellery, coins, photography and silverware.
Klapwijk forecast a rebound in industrial demand this year, with silver consumption from that sector likely to rise to an all-time high.
"We think jewellery will pick up a bit in 2012 as higher gold prices and the continuing shift from gold jewellery to sterling silver should help," he said.
In 2011, silver fabrication demand eased 1.5 percent to 876.6 million ounces due to lower industrial consumption. However, it still notched its second highest level since 2000.
Klapwijk said that investment demand in silver exchange-traded funds, whose physical silver holdings reached around 600 million ounces, should keep the price of the metal steady.
On the supply side, Klapwijk said he expects to see "a historically high level" of scrap in 2012, although it may be marginally lower year-over-year due to a drop in photographic recycling.
Last year, old silver scrap supplies rose 12 percent to a second straight record of 256.7 million ounces. A flood of scrap from silver jewellery, silverware and the electronics industry helped sent prices plunging last year after they briefly rose toward $50.
GFMS, formerly known as Gold Field Mineral Services, is a unit of Thomson Reuters Corp. The World Silver Survey was compiled by GFMS and published by the Silver Institute, a trade group.
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