FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

A Silver Surprise.

A Silver Surprise.
By Rob Davies
Date: March 08, 2006

Silver has been written off many times in the last two decades, justifiably so on fundamentals. But news that investors will be able to invest in the metal through Exchange Traded Funds has been the spur to taking the price back above US$10 an ounce for the first time in 22 years. The fact that its largest market, photography, is rapidly disappearing as digital cameras became ever more prevalent does not appear to be stopping investors wanting to buy it.

Technology remains a key factor for base metals, both in extraction and in changing patterns of use. Silver is suffering at the moment, but aluminum is benefiting from increasing use in the automotive industry, though Ford seems to be having second thoughts about using more of it in its Jaguar brands. While the primary reason is due to tooling costs the rising price of the raw material will undoubtedly have been an issue as well.

A rise of US$73 last week taking it to US$2,447/tonne keeps aluminium substantially more expensive than steel, though that too has risen in price over the last few years. But the absolute level of prices means that a 10 per cent rise in the aluminium price has a much bigger impact on a car makers margins than a 10 per cent increase in the steel price, which would only be a handful of dollars on each car. Despite that, the trend to using more aluminium in the transport industry looks safe as consumers fret more and more about fuel costs.

All the major base metals made good progress last week. Zinc is chasing hard to overtake aluminium and its US$145 rise takes it to US$2,347 /tonne leaves it only a US$100 below aluminium. Strikes in Mexico were a factor pushing copper up US$74 taking it back over the US$5,000 /tonne level to US$5,050. The fact that the strike has now ended and LME inventories have nudged up to 118,375 tonnes were not enough to derail the bull story.

However, the best performance of the week, at least in absolute terms if not percentage terms, was nickel with its US$225 rise to US$15,150/ tonne. Once again it was the supply side driving the story as analysts shaved back forecasts for how much output was going to increase this year. Demand growth in the second half of 2005 was fairly flat as western stainless steel mills cut back and Chinese demand was not enough to compensate for this weakness. SG Securities estimates that overall demand was 0.5 per cent lower in 2005 and was only slightly higher than in 2003. Although the large Voisey’s Bay mine is starting to produce, its initial output and that of other large mines seems to be lagging expectations and has caused the market to tighten. Nevertheless, these new projects will come on stream and will bring the market back into balance as new supply comes on. It will just happen a bit later, that’s all.


LINK: http://www.minesite.com/storyFull5.php?storySeq=3367