Market Trends in Silver 2010

By Michael Montgomery—Exclusive to Silver Investing News

As most investors in the silver market know, 2010 has been a terrific year. As concerns over monetary policy in the US and Europe, debt concerns, and general economic uncertainty linger, investors looked to gold and silver as a hedge against inflation. As gold reached levels out of reach for many individual investors, silver, the poor mans gold, became an attractive alternative. The price of silver on Jan. 4 2010 was $17.17 per ounce, by Dec. 21 2010 the price had risen to $29.25.  The highest price for the year occurred on Dec. 7 at $30.50 per ounce. The price of silver has witnessed a dramatic increase of 70 percent from over the course of 2010.

Coins and bars from the US and Canadian Mints are experiencing record sales each month. The growth of silver ETFs has also contributed the investment side of the market. Individual investors are moving towards ETF’s because of the ease of investing.  The physical storage of coins or bars is no longer a barrier to entrance into the market. In 2010, silver ETFs held about 60 percent of the world stockpile of silver. With the introduction of precious metals ETFs in China and India on the horizon, the investment potential is massive.

Industrial demand for silver has been regaining its strength. The global economic downturn devastated the industrial uses of silver; silver usage in jewelry was hit hard. The jewelry sector is rebounding, and with gold’s near record high prices, silver jewelry is a strong alternative. In November, GFMS published a forecast in which it stated that the “Industrial demand for the metal declined in 2009, but is expected to increase 18% this year.” Driving the industrial demand is electronics, and jewelry, however, the use of silver in a host of new applications will increase demand. These new applications include flat screen TV’s, solar panels, biocides, water purification, and silver-zinc batteries for use in small portable electronics to automobiles.

Lingering economic concerns made investors look to silver as a hedge against inflation. This factor is probably the main reason behind the increase in silver price. James Steel, HSBC analyst stated that “The marginal increase in price has come from investment” Steel continued to say that “Industrial demand sustained it above $15, but it did not take it over $20.” Investors are scared of inflation due to the loose monetary policy in the US, as well as concerns over European debt. Greece was the start of European debt issues, austerity measures and bailouts followed spooking the market. Spain, Portugal, and Ireland are all in the same boat, and the outlook is not very promising.

The Federal Reserves’ quantitative easing did seemingly little to boost the American economy. The influx of greenbacks has only made the market even more afraid of inflation, driving more people towards silver. There is a looming crisis in America that is just starting to show its teeth. “There’s not a doubt in my mind that you will see a spate of municipal bond defaults… You could see 50 sizable defaults. Fifty to 100 sizable defaults… This will amount to hundreds of billions of dollars’ worth of defaults,” stated Meredith Whitney, Wall Street analyst who warned of the 2008 economic collapse, to CBS News. If another round of bailouts comes from the Federal government, which is still uncertain, expect another round of gold and silver purchases pushing prices even higher.

The use of credit default swaps in the housing bubble is what sank the economy in 2008. Most governors and lawmakers don’t see the potential to meet their bond obligations, and are worried that the creation of these municipal bond CDS’ as only adding fuel to the fire.

“Separately, five large derivatives dealers—Bank of America Corp.’s Bank of America Merrill Lynch, Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., and Morgan Stanley—met last month in New York to discuss standardizing the paperwork for “muni CDSs” in an effort to attract more buyers and sellers,” reported Katy Burne, for The Wall Street Journal.

The outlook for silver in 2011 from most analysts is bullish. Increasing industrial demand, ETF’s in China and India, seemingly everlasting economic woes in the western world are all factors for a strong silver market. While uncertainty of price levels is a reality, and something to be very cautious of, most analysts see nothing but upside potential for silver in 2011.