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Silver Market

Silver Market Update 2007

The year 2007 was another good one for silver based solely on its price performance (up 14% from year-end 2006 to year-end 2007). The price rally has continued into 2008 as silver prices tracked gold while the U.S. dollar declined in value. Since 2003, silver has been highly correlated to movements in the prices of both gold and copper.

Silver Supply and Demand
The two primary drivers for silver prices in 2007 were again strong demand in electronic and electrical components plus continued investment demand.

Industrial demand, which includes electronics and electrical applications, now accounts for approximately 50% of global silver demand. Industrial demand has been growing year over year since 2001 (when it comprised 39% of fabrication demand) and likely surpassed the record level set in 2006 of 430 million ounces of silver. Demand reflected continued growth in semiconductor shipments, and for a variety of consumer products, such as flat-screen television monitors.

GFMS Limited, which supplies silver data to members of The Silver Institute, noted in a presentation in early 2008 that photographic demand continues to erode due to the impact of digital technology, particularly in the consumer camera market. Photographic demand in 2007 comprised approximately 15% of total demand, down from 25% of fabrication demand in 2001. However, as a result of the decline in photographic silver demand, there is a corresponding decrease in photographic scrap supply.

GFMS believes jewelry and silverware demand was up a little year over year in 2007, and investment demand was strongly positive.

Investment demand emerged as a significant growth market in 2006 for the first time in several decades. This growth is illustrated by the success of the iShares Silver Trust, which commenced trading in the U.S. in 2006. At February 1, 2008, the trust held 164.6 million ounces of silver. Several European silver exchange-traded funds as well as the Central Fund of Canada hold another 50–60 million ounces of silver.

Supply of silver in 2007 was met through a combination of mine production (estimated by GFMS at 74%), scrap recycling (20%), government sales (4%) and hedging by base metal producers (2%).

Mine production is estimated to have grown by about 20 million ounces (3.0%) globally in 2007 compared to 2006. By source of production, base metal mines in Chile and Bolivia and new mines in Mexico saw higher silver output, which was partially offset by lower production in Russia, Peru and Canada.

With respect to government sales, the major contributor was Russia, due to attractive prices. It is estimated that selling by India and China has ended. The cessation of Indian government sales is significant, since India historically has been a large importer of silver and government sales reduced imports dramatically in 2006. In total, government sales in 2007 are estimated at less than 40 million ounces.

Overall, scrap recycling in 2007 declined by almost 10 million ounces, likely reflecting lower recycling levels of photographic silver. Silver prices are still not high enough to stimulate large-scale scrapping of jewelry and silverware.

In summary, overall fabrication demand in 2007 is modestly higher, according to GFMS.

Outlook For 2008
GFMS notes that global supply and demand for silver has moved from a deficit in supply to a balanced market, and that mine supply is expected to increase at a faster rate (6%) than demand in 2008. However, coupled with flat to lower scrap supply and government sales set to fall further, increased mine supply will likely have a limited impact on silver prices.

On the demand front, the first half of 2008 looks weaker than the second half, when lower interest rates and fiscal stimuli in the United States are expected to impact consumers. GFMS anticipates overall headwinds from weaker fabrication demand and higher mine production but believes investors will follow gold's lead rather than base metals.

Data Source: Estimates are taken from GFMS Silver Market Update, January 28, 2008 for The Silver Institute.

New Developments in Silver Applications
New applications that take advantage of silver's antimicrobial properties again reached North American markets in 2007. Last year's developments included toothbrushes with silver, antimicrobial flooring for the food industry, solar panels, new soaps and fast clotting powders containing silver for wounds.

One interesting milestone reached in 2006–2007 was the replacement of photography by electrical and electronics as a dominant use of silver. Electrical and electronics comprise close to 50% of industrial fabrication demand.

Silver does not spark when a current is applied, making it the best electrical conductor for certain applications. Growing U.S. shipments of metal contacts using silver instead of other metals were reported in 2006 by the U.S. Census Industrial Reports. Silver is the least expensive of the most reliable switches and circuit breakers. The value of such applications, which includes other precious metals, was estimated at $310 million in 2006.

Some 80 million ounces of silver are used annually in catalysts for the production of ethylene oxide and formaldehyde. Ethylene oxide is mostly converted to ethylene glycol, a component of polyesters. Most of this silver is recycled. Use of silver as a catalyst has grown 30% in the past five years.

In 2007, The Silver Institute reported that chipmakers AMD and Intel have been shifting from lead-based solders toward tin-silver alloys in North American consumer products, including computers and mobile phones. Their move follows the lead of the European Union in 2006 in banning lead-based solders, which were increasing toxin levels in waste dumps. The EU action is believed to have added tens of millions of ounces annually to global silver consumption. More jurisdictions in North America are now requiring that circuit boards be recycled instead of buried in waste dumps.

Finally, coating maker Xiom Corporation has developed an environmentally safe self-cleaning polymer/ceramic–based coating for seagoing vessels. The polymer matrix holds copper oxide and silver ions in place to prevent fouling of vessels, which increases fuel consumption and maintenance costs. Although copper has been used for centuries to prevent fouling, the new ship and boat hull protective coating will last five times longer than traditional paints.

As the 21st century ages, silver is looking increasingly "green."