Silver Demand

The silver ETF (SLV) briefly punched through $140 one day last week after hitting lows just under $96 last June. The quantity of silver backing the ETF (the metal to back the ETF is put into storage, thus creating physical demand) has been rising steadily and now exceeds 125 million ounces, according to Jeff Christian of CPM Group, a commodities research firm. The Silver Users Association reports that worldwide demand for silver in 2004 was 367 Moz for industrial uses, 181 Moz for photography, 247 Moz for jewelry and silverware and 41 Moz for coins. These numbers predate the silver ETF which is now a major competitor for available silver. Interestingly, the total demand in 2004 was 836 Moz yet the amount of newly mined silver was only 634 Moz, with the balance made up from scrap metal. We view this shortfall of production, combined with increased ETF demand as reasons to think that silver (and gold) prices will continue to rise in a sawtooth pattern. The silver ETF is currently somewhat overbought but look for the next run later this year to take it over $150. The 2/20 edition of The Wall Street Journal reports that "any continuation of inflows into the silver ETF eventually could result in 'critical supply' tightness. This may result in gold and silver taking a turn in the rotating manias of the last 6-8 years.

Strategy Update: The Dynamic Global Macro Strategy continues to have a commodities emphasis with 45% of the strategy in commodity ETF investments. Performance YTD (right) compared to the S&P 500 has been favorable. The strategy has outperformed by a wider margin its stated benchmark: the balanced index.