Commodity Strategists: Silver to Fall, JPMorgan Says

[HenryTo]

Just got a DVD "special report" from Monex explaining the potential for silver prices to skyrocket going forward. At the same time, we have the article below. Note that silver is still continuing to report a supply deficit every year, however.

As for me - I bought a bunch of silver eagles and Kennedy half-dollars back in 2001/2002 and probably won't purchase more until the sentiment for silver gets more bearish.
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Commodity Strategists: Silver to Fall, JPMorgan Says
July 27 (Bloomberg) -- Silver prices will fall next year, lagging behind gold for the first time since 2002, as slowing global economic growth curbs demand for the precious metal from makers of electronic products, JPMorgan Chase & Co. said.

Silver will average $6.70 an ounce in 2006, compared with $7.10 an ounce this year, Anindya Mohinta, an analyst at JPMorgan in London, said in a July 22 report. It traded at $6.99 an ounce today in its ``fixing'' in London, a price set by traders at Bank of Nova Scotia, HSBC Holdings Plc and Deutsche Bank AG.

Industrial silver use will increase 0.5 percent to 11,477 metric tons in 2006, down from 2.3 percent this year, according to JPMorgan, as growth in the largest economies slows. The Organization for Economic Cooperation and Development in May cut its estimate for world growth next year to 2.8 percent from 3.1 percent. Unlike gold, most demand for silver comes from industrial users, including makers of items such as electronic circuits for cellphones and computers.

``The key component is industrial use,'' Mohinta said in a phone interview yesterday. ``If that slows down, the impact will be felt'' on prices.

Silver prices in London have risen 49 percent since the start of 2003 compared with gold's 23 percent gain. The last year in which gold outpaced silver was 2002, when it advanced 25 percent, compared with silver's 2.8 percent increase.

Increasing Supply

As a precious metal, silver belongs to the same asset class as gold, providing a haven for investors in declining markets. Still, gold is likely to rise next year because it has fewer industrial uses, Mohinta said. The bank forecasts gold will average $450.25 an ounce in 2006, up from $434.0 this year.

Last year, 63 percent of silver was used in industry and photographic film, according to JPMorgan. By comparison, 8.9 percent of gold was used in consumer applications, according to London-based consulting company GFSM Ltd.

The supply of silver will increase in 2006, narrowing the gap with demand, according to JPMorgan. Supply will grow 5.1 percent to 26,589 tons, lagging consumption by 561.3 tons, it said. This year, the deficit will be 1,884.3 million tons, the bank forecast. Output at mines will rise 6.5 percent in 2006 to 19,792.4 tons.

``Mine supply has and should continue to rise from byproduct at lead and zinc mines,'' Mohinta said.

BHP Billiton, the world's largest mining company, was the No. 1 producer of silver in 2004, according to the Washington- based Silver Institute. Mexico's Industrias Penoles SA was the second-largest and Poland's KGHM Polska Miedz SA, also the biggest miner in Europe of copper, was third.

Declining Use

The use of silver in photographic film, the metal's third- biggest application, is declining. Filmmakers are cutting use of silver by as much as 5 percent a year, according to JPMorgan. Photography will account for 5,263 metric tons of silver use in 2006, compared with 5,492 this year, as digital photography gains popularity. Mohinta sees use falling by up to 5 percent annually in coming years.

Eastman Kodak Co., the word's largest photography company, said last week it will eliminate up to 10,000 jobs after film sales declined faster than anticipated. The Rochester, New York- based company posted its third straight quarterly loss and said sales of film-based products including cameras dropped 15 percent, while digital revenue rose 43 percent.

Japanese digital camera maker Pentax Corp. said in May that prices for digital cameras fell by almost a quarter last year.

`The price differential for people to stick with conventional cameras has got to be big, and that's not the case,'' Mohinta said.

Rising Dollar

Mohinta, 24, joined JPMorgan's metals team in November, and researches markets for precious metals, tin and ferroalloys used in steelmaking. He's more bullish on silver than John Reade, a London-based precious metals analyst at UBS AG, who said in June silver will average $5.75 in 2006 compared with $6.55 this year.

Mohinta and Reade both said rising U.S. interest rates will curb investor demand for silver and other dollar-denominated commodities as a hedge against weakness in the currency. On July 14 JPMorgan trimmed its third-quarter average silver price forecast by 3 percent to $7.15 an ounce, citing the strengthening dollar. The dollar has increased 13 percent versus the euro this year, after declining in 2004.