Silver to outperform gold in 2009

From Stockhouse

Silver prices are poised to outperform gold while moving dramatically higher later this year due to increasing investment demand, attendees of the world’s largest mining conference in Toronto were told earlier this week.

Speaking at the Prospectors and Developers of Canada Association (PDAC) annual convention, German investment fund manager Oliver Frank told a packed room at the “Accessing European Capital” forum that silver will likely end the year in the $25 range. This bold projection is almost double current silver prices.

A late 2009 surge in pent-up buying demand, particularly among Europeans, will prove to be the catalyst to silver reaching historic new highs, added the CEO of the Butzbach-based investment fund, Silver Capital AG.

He also believes that heightened global investment demand will also help gold to breach the hallowed $1,500 mark by year’s end – an appreciation of about 60% over its March ‘05 spot price close.

Both scenarios should stem from investors continuing to flock to gold and silver as “safe haven investments” in response to the onset of a hyper-inflation in the U.S. economy, Frank added.

Yet, he believes silver should enjoy a bigger percentage boost in value because physical demand has been consistently outstripping supply in recent years.

“In Europe -- Germany in particular -- everyone is trying to buy silver bars and coins, rather than gold, but there just isn’t the physical supply available. Global above-ground inventories are severely depleted. So, people these days just can’t get their hands on enough silver,” Frank said.

Hence, it is becoming increasingly popular for investors to gain access to the silver market by way of a proxy. This involves buying into a silver-denominated exchange traded fund (ETF) – an index fund that tracks silver’s performance. No less than 200 million ounces of silver have changed hands in this manner over the past 12 months, which is an unprecedented figure, Frank pointed out.

However, his countrymen have a sentimental attachment to buying physical silver, particularly in the form of coins, as this proved to be a crucial investment lifeline for many of them during the 1930s, Frank says. This was an era in which hyper-inflation ravaged the German economy. In fact, Germans have traditionally valued silver coins as a hedge against political or economic crises dating as far back as the 15th century.

Frank also forecasted that industrial demand for silver will remain robust during the balance of the year, especially since it has a growing reputation for being an “enviro-metal.” This is due to its anti-bacterial qualities and its uses in a growing diversity of high tech energy-saving applications.

He added that all of these developments will prove to be a boon to ‘emerging primary silver producers’ (ones that don’t extract silver merely as a by-product of gold or base metals mining). This is especially the case now that silver is about to establish a sustained trend reversal, he predicted. It will lead to silver revisiting the $15 level over the next three months, before re-establishing its $20-$21 highs of 2008 by late summer.

Furthermore, a rising tide market for silver prices won’t be the only major value driver for primary silver producers this year, Frank noted. Notably, oil’s pronounced drop in price in recent months has significantly driven down mine operating costs – a scenario that is expected to continue for the rest of 2009.

Any emerging silver producer that matches lower mine operating costs with an expansion of silver inventories and a corresponding increase in output this year is onto a winning strategy, he added.

“Money managers and other smart money are shifting more of their cash positions into the stocks of silver producers. Companies like First Majestic are doing the right thing right now by raising money to spend in the ground,” he went on to say.

“This will translate into increased output to capitalize on heightened demand for silver, and corresponding higher silver prices. This should generate increased earnings and boost share price valuations.”

(First Majestic Silver Corp. [TSX: T.FR] [Frankfurt: FMV] announced the closing of a $21.2 million equity financing on March 5, 2009).

In the event that any of the world’s tiny handful of emerging primary silver producers manages to ramp up production to a critical mass of around three million ounces, they will surely benefit from meaningful economies of scale, Frank said.

This should provide a comfortable earnings buffer against any future volatility in silver prices. And that, he says, makes for a much more dependable and successful business model that will attract considerably more buying interest from institutional investors.

Great Panther Resources Ltd. (TSX: T.GPR, Stock Forum) is another fast-growing silver producer that Frank singled out as an example of a company that has very successfully curtailed mine operating costs while maintaining a steady trend of setting new year-on-year production records.

“They’re doing the right things to ensure a good upside for their share price in 2009,” he added.