By Jeffrey M. Christian

Managing Director, CPM Group

The price of silver rose sharply after August 2005, moving from approximately $6.75 to $9.30 per ounce at the end of 2005 - beginning of 2006. Prices spiked much higher during the first five months of 2006, reaching $15.20 on an intraday basis on 11 May. Silver prices spent most of the time from 1989 through 2003 between $3.50 and $5.80 per ounce. Prices shifted to a higher range of $5.50 - $8.25 per ounce in 2004 and 2005 and they may be in the process of shifting higher once again, perhaps to a range of $6.50 to $10.50 per ounce, perhaps even higher. This upward shift reflects increased investor interest in silver, as part of a broader move by investors into commodities. Silver in particular is capturing a great deal of interest and attention from a wide range of investors, including many institutional money managers, hedge funds, and other asset managers.

The re-appearance of silver investors as net buyers of silver has shifted the fundamental supply/demand balance in a profound way, in the most dramatic change in the silver market since 1990.

The rise of investor interest becomes self-fueling. Since many investors buy more of an asset with a rising price, the increase in silver prices has generated additional interest in silver from new investors. It is not that investors have rediscovered silver. More accurately, a new wave of investors is discovering silver. Many notable investors such as George Soros, Warren Buffett, and Bill Gates have invested in silver since the 1990s.

What has changed is that more investors are buying silver, both in physical form and through various derivative instruments such as futures, forwards and options. The range of investors buying silver for the first time is impressive, including some of the largest professional asset management companies in the world and private individuals in North America, the Middle East, Asia and Europe. These investors have been attracted to silver for several reasons. For one thing, silver prices have been rising strongly, outpacing many other types of assets, including most stocks and bonds. Additionally, other investors have been buying silver because the fundamental case for silver is solid. Fabrication demand is rising, mine production remains relatively stagnant and available inventories continue to be drawn down to meet fabrication demand. In a period when many investments have been lingering horizontally, the price strength and compelling fundamentals of silver have been instrumental in pulling investors toward this metal.

One of the issues facing the silver market in 2006 and beyond is the metal’s capacity to accommodate increased investor interest. The truth is that there is not that much physical silver bullion lying around for investors to buy. The situation is further exacerbated by the fact that over 70% of mined silver comes in the form of a by-product of production of other metals and hence will not be increased even in a favorable price environment. This situation also should help push silver prices higher, which speaks to the need for silver-oriented investment products.

Futures, forwards and options have “absorbed” some investor interest. The volumes of silver futures and options being held by institutional investors are at record levels, while total investor activity in silver futures is the highest since the 1970s (with the exception of the 1994-1995 levels which included large spec positions reportedly held by a couple of large bullion trading companies). The investor demand for silver metal and products is clearly increasing especially since many investors do not invest in futures.