Silver stocks trashed with metal price more volatile than gold

In just months, 43 listed miners, developers and explorers of silver have seen 51% of their market value, worth some USD 21bn, go begging as silver bullion crashes down by 40% in price.

JOHANNESBURG - 

With the exception of listed producers of zinc, where the underlying dollar metal price has plunged 49% from its high, listed silver stocks stand out as the most trashed up sub-sector in the global resources arena.

Dollar silver bullion prices are now 40% from highs, seen in early March this year, compared to a 23% fall in gold bullion prices. The average listed silver stock - led by well known names such as Silver Wheaton, Hochschild Mining, Silvercorp, Coeur d'Alene, and Apex Silver - has surrendered 51% of its value. When measured over 43 miners, developers and explorers of silver, more than USD 21bn in market value has gone begging, in just a matter of months.

The silver market is distinguished from gold by a number of key factors. More than two-thirds of annual silver mine supply is a byproduct of other mining - mainly gold, copper, lead and zinc - translating in 2007 to about 600m ounces of silver. BHP Billiton, the world's biggest diversified resources company, and the No 1 miner of silver, hardly mentioned the metal in its detailed annual results presentation this week.

Primary silver mining - led by Fresnillo, Pan American Silver, Hochschild Mining and Coeur d'Alene - comprises about 30% of the total, a percentage that is not anticipated to rise materially as projected annual silver production increases from 900m ounces to nearly 1 trillion ounces in 2010.

Beyond scrap recycled back into the market, the fundamental picture for silver has long been cloyed by opaque above ground stocks held around the world, mainly by China, Russia, and India, but at least these have been falling over the past 10-15 years to meet the annual excess of global demand over new mine supply.

Demand for silver is nearly fully explained by three cores: industrial and decorative uses, jewelry & silverware, and photography. Investment demand for silver has traditionally been derived from the perception that the metal is less tradeable and thus more volatile than gold bullion. Add to that the notion that both metals have long displayed a negative correlation with the dollar, and silver prices tend to overshoot both ways.

Historically, most investment activity in silver has been driven by short-term speculators on the New York Commodities Exchange (COMEX), the Tokyo Commodities Exchange (TOCOM), and the Over-the-Counter (OTC) market.

But starting in May 2006, investors were also able to invest directly, at minimal entry cost, and transparently, in silver bullion via a regulated exchange, in the form of the iShares Silver Trust (SLV-AMEX) exchange traded fund (ETF). By the end of 2006, the silver ETF had taken up 122m ounces of silver. A further 29m ounces of new silver demand were taken up by the ETF in 2007, partially offsetting net futures disinvestment.

Just a few weeks ago, on 30 July, the Silver Institute announced that the iShares Silver Trust ETF achieved a major milestone, with more than 200m ounces of physical silver held by the trust on behalf of investors, then worth USD 3.5bn.

"Silver's strong price performance over the past three and one-half years has brought renewed investor interest to the white metal", was a quote attributed to Michael DiRienzo, executive director of the Washington-based Silver Institute. Over the past two or so weeks, the value of physical silver held by the ETF has fallen by close to a billion dollars.

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