It was only five weeks ago (late September) that world silver prices collapsed sharply with the market briefly falling below the psychological level of $30 an ounce because of risk aversion and large-scale sell-off.
It was reminiscent of events earlier this year in April when the market tanked by almost a third following successive increase in margin requirements in the face of what was seen as overheated market with prices hitting a three decade high of about $50/oz. A firming dollar too contributed to the decline.
It may be recalled, that also the time when rapidly falling prices spurred physical demand especially from China and India. India's high-season came in fortuitously to provide downside support.
Also, it was a welcome relief for industrial consumers of silver who had faced hardship because elevated prices tended to push end-product costs higher and depressed end-product demand.
World prices
World silver prices have of course regained the $30/oz mark and are currently in the low $30s. But, clearly, the precious metal is struggling to extend the gains and trades largely range-bound. One can clearly see the market participants are still not convinced if the metal deserved a rally.
On current reckoning, they may be justified because the world silver market is actually in surplus; and any price escalation is simply because of the metal piggybacking on gold.
This indicates that for silver prices to rise, investor demand remains the key; but investor would come in only if they see potential for price appreciation.
However, at the current levels ($32-34), physical demand is seen satisfactory. Physically backed ETP inflows have expanded in October. The US Mint has reported strong sales of silver coins in September.
China role
An important factor to note is China's role in the world silver production and trade. The Asian major is a large producer of the metal.
It is importer and exporter both; but has remained a net importer for two years running. The growth is driven by the photovoltaic cell manufacturing sector.
As for world mine supply, it is set to grow this year. In other words, the silver market will remain in a state of surplus; which in turn means, for prices to break out of the current range, renewed investor interest is necessary.
For 2011, total physical supply covering mine production, net official sector sales and scrap recovery is an estimated 32,000 tonnes, while total fabrication demand covering industrial demand, photography, jewellery and silverware as well as silver coins is estimated at around 28,250 tonnes.
This leaves the market in a state of physical surplus from which some quantity will flow to ETPs.
For 2012, fabrication demand growth is set to far outstrip supply growth as a result of which the surplus will be down by about 500 tonnes from the current year.
In April, many investors including a very large number in our country who had been carried away by the meteoric rise of silver (in utter disregard of the fundamentals) lost heavily when prices collapsed.
In commodity markets, it is axiomatic that prices cannot defy the fundamentals for long. It is also necessary to understand that investor demand is fickle and can change quickly.
Developments surrounding European sovereign debt in general and Greece in particular need to be watched closely. China's appetite for the metal is another factor.