Silver Karvy

Riding the Silver Bull
Silver is targeting $20 per ounce or Rs.30000 per Kg

By the end of accounting year 2006-07
Mine Industrial
Supply Demand
Govt. Jewelry
Sales Demand
Scrap Photography
Supply Demand
Exchange Investment
Inventories Demand
Total Total
Supply Demand
Silver has begun its upswing and may be expected to reach a high
of $20 during next year. Currently it is trading in the range of $12 -
$14. Fresh buying is expected to emerge at current levels which to
stop falls in the next year.
Page 1 of 31
Silver Prologue
“Too many people miss the Silver lining,

Because they are expecting Gold” - Maurice Setter
S
ilver is time and again called “poor man’s gold.” It has always
been considered to be less attractive than gold and other precious
metals like Platinium and Palladium and obviously the price of silver
has always been much lesser than the price of these precious metals, which
creates an illusion that that silver, is somehow worth less. Silver is the
poorest metal among the precious metals pack. This is also evident from
the comparison of silver prices with other precious metals, where silver is
quoted at $12-$14 per troy ounce where as gold is quoted at $550 -
$600. There are many ironies about silver and the most recent one is that
this poor cousin of Gold has made its devotees or investors richer than
any other precious metal and also it has given returns far more than any
other investment option at-least in the first quarter of 2006.
Recently a rally in silver followed by sideways movements for sometime

raises a question that is the silver rally over or there is still a lot to expect
from this highly undervalued asset. Obviously the investors and analyst
world around are optimistic about silver. This is only due to understated
silver fundamentals for a long time which are slowly playing their role and
helping silver to express its fundamentals and prohibiting silver from
following Gold blindly.
Looking back in the history it can be seen that silver was able to hit highest
spot price of US$50.36 on January 17, 1980. On contrary Gold climbed
to an historical high of US$875.00 in the same month. Depending on these
numbers, silver investment does appear to be second to gold. But closer
analysis shows and proves that silver has been a better investment at
times, and has given investors a higher return than gold ever has.
Page 2 of 31
If we focus on the bull run of silver and gold in decade 1971-80 we can
find that silver started its gigantic price run-up in 1971 from a base price of
US$1.39 per ounce. Over the time silver reached its peak of US$50.36 in
1980 silver investors had realized a shocking cumulative return of
approximately 3,600 %. During the same period Gold also did well but
not as well as silver. One troy ounce of gold was priced at US$40.80 in
1971. It reached its price peak of US$875.00 per ounce in 1980 which
resulted in a return on investment of approximately 2,100%. Thus there is
a profit difference of 1,500 % which can be a good reason for any
investor’s to buy silver over gold. Past is past and also people would
attribute the silver rally to the market cornering strategy of Hunt Brothers.
If we look at the recent past in the first quarter of 2006 among the
commodity pack highest returns were given by silver, this hints that
whether a brisk bull run foreseeable in near future. In the current scenario
when so many investment options are open, the question is whether an
investment in silver bullion, today, is a wise decision to make and is this the
time to enter the precious metals game. This report analyses the long-term
and short-term fundamental factors expected to move silver prices. It is
believed that the short-term weakness and sideways movement going on in
silver is a great opportunity for the late-comers to join the great silver rally.
This report would be of use for serious investors to understand the
fundamental front of silver and understanding the intrinsic value of silver.
This would also help them a bit to make an informed decision while
investing in silver and creating wealth.
But the fact always remains is that no investment return can be

guaranteed. Never has, never will be. The idea is of investing in the
markets, is to capitalize on the growing fortunes of various asset classes.
With the availability of innovative financial instruments like derivatives it
possible for an informed investor to capitalise not only on the growing
fortunes of assets by going in for Long positions but also on the dooming
destiny of assets by short positions on the reversal of the bull run trend.
In the particular case of precious metals and silver bullion, signals are such
that there is a huge prospect of silver Bull Run in near future and beyond.
Page 3 of 31
Price history
Silver Prices 1975 - 2006 (Weekly Average)
US$50.36 on January 17, 1980
US$14.27 on April 19, 2006
Source: Bloomberg Service
Significant Events Affecting Silver Prices Since 1950

(Source: USGS)
2006 Launch of Silver ETF by Barclays at American Stock Exchange.
1985 U.S. Mint authorized to begin minting a silver bullion coin
1979- Attempt to corner the silver market by Hunt Brothers

80
1968 Redemption of silver certificates for silver could only be made until June
24; thereafter, silver certificates would be exchanged for Federal
Reserve Notes
1967 Announcement by U.S. Government that all silver coins would be

withdrawn from circulation
1965 Silver eliminated from all U.S. coins except the half dollar, which has its
silver content reduced from 90% to 40%
1963 Silver Purchase Act and various other legislation repealed; U.S.
Treasury authorized to print Federal Reserve Notes, which were not
redeemable for silver, for circulating currency
1950- Huge U.S. Government silver holdings largely depleted

68
Page 4 of 31
Silver Prices Jan 2006 - April 2006
Source: Bloomberg Service +57.1%
Silver prices in 1st four months of 2006 have averaged $10.42, with a rise
of 42.53% rise year-on-year in spot markets and 19 year high. Annual
average price of silver in 2005 was $7.31 as per London Silver price
fixings.
A rush in investment activities in silver drove much of the rally though a fall
in net government sales and higher industrial demand were also important.
Silver prices staged a rally in the first 4 months of 2006 with a whooping
rise of 57% compared to the opening price on 2nd Jan 2006.
Gold, Silver Prices Jan 2006 - Apr 2006
Silver Price
Gold Price
Here it can observed that both gold and silver prices are moving upwards
but till 2nd week of March Gold leads the rally where as in the later part
silver lead the rally in the precious metals pack.
Page 5 of 31
Real Price of Silver for past 600 years
All time high $806
All time low $4.73
Source: www.goldinfo.net\silver600.html
600 year real prices if considered to evaluate present silver prices, silver
seems to be highly undervalued. The current fundamentals do not agree
with the present day prices of silver. Therefore understanding the
fundamentals of silver and finding potential signals that may spark of an
unstoppable silver rally becomes very important.
As silver has given highest returns among the commodity pack in the 1st
four months of 2006, it has attracted the attention of most of the investors
and the question to whether there still there exist the potential for silver to
grow or has its bull run is to subside in near future. Thus the timing of this
report becomes very important to understand this unusual commodity
and so that this understanding can aid little bit in taking informed decisions
about investments in silver.
Page 6 of 31
Silver Supply Dynamics
Like all metals or precisely precious metals, silver cannot be created. It

occurs naturally. The source of silver are mine production, government-
central bank reserves (which is also termed as above ground supply of
silver) and recycled scrap. Delay, interrupt or reduction in any one of these
supply sources result into big market price hikes, as daily demand for silver
bullion begins to surpass supply.
Classification of Silver Supply Sources
Silver Supply
Below the ground Above the ground
Mine Production Net Govt. Sales Old Silver Scrap
Primary Silver Mines
Lead / Zinc Mines
Copper Mines
Gold Mines
World Silver Supply 1992 World Silver Supply 2004
Mine production of silver is the largest component of silver supply. It

can be seen that mine production accounts for nearly 72 % of silver supply.
Other sources of silver being scrap and sales by government bodies also
play their role in meeting the ever increasing demand of silver. Government
sales are most done to stabilise the price of silver or in crisis situations like
war or natural disasters. The detailed trend analysis of the various source of
Page 7 of 31
silver will facilitate in predicting the future movement of silver production

and its repercussions.
Total Supply
Mine Production
Old Silver Scrap
Net Govt. Sales
Mine production registered a 4% increase year-on-year to achieve a

record high of 634.4 Million ounces that amounts to 19,731 tonnes in year
2004. Statistics of 2005 are yet to be released in World Silver Survey 2006,
but are estimated to increase by 2% year-on-year in 2005 and the
expectations for 2006 are 658 Million Ounces.
It is quite evident that mine production is increasing where as old silver

scrap and Net govt. sales are stable over time and they also contribute less
to the total supply of silver.
As per the latest available World Silver Survey 2005 it has been seen that:
• The global mine production has registered 4% rise year-on-year
and reached 634.4 Million ounces (or 19731 tonnes)
• Net Government sales have declined by 30% y-o-y1 due to
significant fall in release of silver from Chinese stocks.
• Scrap supply has fallen to four year low of 181.1 Moz2
• Higher prices also encouraged producers form increasing their hedge
covers, leading to accelerated supply.
1
Year-On-Year
2
Million ounce
Page 8 of 31
Mine production of silver has registered strong growth and it is estimated

that it will further add to supply in near future. Accurate figures for the year
2005 and 2006 can be got only when world silver survey-2006 is published
in august. But the secondary data suggest that there won’t be much
fluctuation in the mine supply of silver.
The increase in mine production was at record high in year 2004 at

634.4 Moz. This was due to growth in production in primary silver mines
and also due to increase in production of Lead/Zinc and copper mines. Fall
in production was registered only in the category where silver is a by-
product of gold mining. The output of silver got from gold mining decreased
by 2% on year-to-year basis. Increase in silver production was due to bulk
increase in production at Mexico, Peru, Australia and China. Significant
increase was also seen in Russia and Chile. Additional boost in production
was given by the increase in throughput at Cannington mine in Australia
which is the largest silver producing mine of the world. Its capacity
increased by 20% and reached 46 Moz in 2004. Similar developments in
mines of China and Russian mines added up to the supply.
Decrease in production was observed in Kazakhstan, Bolivia and

Indonesia. Closure of several mines in Bolivia accounted for decrease in
silver production. Moderate declines were seen in Canada, Sweden and
Poland. Individual supply dynamics of each nation affected the supply of
silver but the net effect was increase in mine production of silver.
Silver Mine Production 1992 - Region wise Silver Mine Production 2004 - Region wise
Page 9 of 31
By-Product analysis
When considering the supply of silver from mines it is very important to
have a look at the break up of the various source metal mines and their
contribution in silver supply. Around 30% of silver comes from mines where
the main source of revenue is silver. Such mines are called primary silver
mines. As per the graph shown below, same amount comes from Lead/Zinc
mines. This is important as price of silver will have impact on primary
output, which means that amount of silver mined is more a function of the
price of other source metals.
Silver output By Source Metals - 2004

Silver output by source metal
Output / Year 2000 2001 2002 2003
Primary 25.45% 25.54% 28.74% 28.56%
Lead/Zinc 34.74% 33.53% 31.76% 32.79%
Copper 23.67% 25.73% 25.28% 26.18%
Gold 16.14% 15.19% 14.22% 12.46%
Thus the prices of Lead, Zinc and copper will have a major impact on the
amount of silver mined from these mines. There exist a strong correlation
between the prices of silver and these metals.
Correlation Copper Zinc Lead Gold

(Daily Prices for last 10 years)
Silver 0.930 0.823 0.898 0.869
Thus the prices of Lead, Zinc and copper will have a major impact on the
amount of silver mined from these mines. For example right now the prices
of copper are rising high and everyday new milestones are achieved by
copper. This leads to motivation for more production of copper in copper
mines. With increase in copper mine production the supply of silver is bound
to increase as no miner would like to part with such a precious by-
product. Thus the prices of these metals become important parameter to
predict the outlook of silver prices.
Page 10 of 31
Supply from above the ground
Supply from above the ground constitute of Scrap and Government

sales. Together they constitute of around 25% of silver supply. Scrap is
recovered from industrial waste or existing goods such as photographic
chemicals, jewellery, discarded electronic goods such as computers etc.
Disinvestments and government sales comprise of old coins and bars of

silver that return to market. Another minor component of supply of silver is
producer hedging or early sale one by mining companies of future
production by entering into forward contracts. This is done to hedge against
the price and quantity risk associated with silver. Like hedging there can
also be de-hedging and the effect on supply will be on net basis.
In 2004 net government sales were Silver Price
observed to have declined by 30% on y-

o-y basis. This was mainly because China
decreased its sales of government
stocks. Whereas Russia showed an
increase in government sales, while India
has given intentions to sell part of its
silver stock starting from 2005 in phases.
Fall in global scrap was seen in 2004 is

continuing. The decline was seemed to
by mystic even while the silver prices Silver Price
saw an increase by around 30%. Scrap

supply from photographic industry was
Scrap
also reduced due to the significant fall in
use of silver halides in photographic
fabrication. This decline in silver scrap
was due to high penetration of Digital
photography and injects printers across
the world. Also increase was seen in
scrap due to tighter environmental
legislation which has facilitated
additional recycling.
Page 11 of 31
Long Term Supply Outlook
Factor Outlook Effect

Longer term, silver mine production is
likely to rise; 22 million ounces of new
capacity could come on-stream in 2006 from Increased mine production
six mines. In late 2007, Apex Silver's San would increase the silver
Silver Mine
Cristobal mine will produce 22 million production and also offset
Production
ounces annually when it comes on line. the decline if any due to
Barrick's Pascua Lama could produce 18 closure of mines.
million ounces annually when it commences
production in 2009.
Silver Silver as a by product in mines of Lead, Zinc
production and Copper is expected to increase by 5% Silver production to increase
in mines of and more as the demand and prices of these with base metals production
Lead, Zinc metals especially copper have seen huge increase.
and Copper. increases in 2006.
Silver silver production will be not
production Silver production in Gold mines is expected much affected as amount of
in Gold to decline following the past trends. silver got from gold mines will
Mines be offset by base metals
Recognizable government sales of stocked Govt. sales could act as price
Net Govt.
silver are expected only from Russia and stabilisers but the effects on
Sales
India 2006 onwards. prices are temporary.
Decreased Scrap supply of
Net Scrap supply is expected to decline
Scrap silver will not affect the
independent of price increase due to declining
Supply prices but will add to the
photographic scrap.
supply demand deficit.
Silver stocks are declining rapidly as they
are the only sources to overcome deficit of
ETF would lead to increase in
silver and the trend is expected to continue.
Silver stocked silver which has
But silver stocks will be replenished due to
Stocks caused price rally and same
the launch of Exchange Traded Funds
will continue further.
which are expected to store 10% of annual
silver demand
Total Supply Supply in 2006 would follow
The net effect of silver supply is slightly
the patterns of past three
positive due to increased mine production
years and expected to reduce
and expected to increase not more than 4%
the deficit for 2006 to 50
considering the conservative use of silver
million ounces compared to
stocks and certain stock that cannot be used.
200 million ounces of 1997.
The analysis of literature and statistics of various sources of supply of silver

give positive picture for the silver supply but the deficit between the supply
and demand is expected to stay and the repercussions of this deficit would
be felt only when the inventories fall to zero.
Page 12 of 31
OPPER
Silver Demand Dynamics
Demand of silver has three main components namely:

• Jewellery & Silver ware
• Industrial Fabrication
• Photographic Fabrication.
Another minor component is Coins and medals. Other avenues of demand
that are on rise are government purchases and investment. These two
are taken on net basis as there can be government sales and
disinvestments of silver also. Since 1992 net purchases by government are
not significant but the role of investments in silver has seen dramatic
changes. Silver investment is the reason for the recent rally of silver prices.
The components of silver can be classified as:
Classification of Silver Demand
Silver Demand
Industrial Fabrication Investments
Govt. Purchases Personal Investments
Indst. Application
Photography
Jewelry, Silverware
Coins & Medals
Silver demand is governed by various application of silver. Sale of the goods

in which silver is used like silver batteries; tableware, etc determine the
demand of silver in the market. Events like declaration of decline in sales of
analog cameras affect the prices of silver. New applications of silver like in
medicine and RFID tags used by retail stores also affect the demand and
price dynamics of silver.
Most of the industrial Main Uses For Silver
applications of silver, the Batteries Electroplating
demand is price inelastic as Bearings Jewellery and Silverware

Brazing and Soldering Medical Applications
there it is required in minute
Catalysts Mirrors and Coatings
quantities where as the demand
Coins Photography
of silver in jewellery is highly Electrical Solar Energy
price sensitive. Electronics Water Purification
Page 13 of 31
World Silver Demand 1992 World Silver Demand 2004
It can be noted at very first glance that the demand for Industrial
applications has increased with time and demand for photography has
declined due to the advent of digital photography.
Here the net implied investment is the balancing figure that that balances
the supply and demand and it is also evident that the government
purchases do not exists and demand due to investments is on rise.
World Fabrication Demand of Silver
Total Demand
Industrial Applications
Jewelry & Silverware
Photography
Coins & Medals
Demand of physical silver is mostly due to industrial demand and the

sudden increase in industrial demand during year 2000 is due to the IT
bubble. Statistics of 2005 are yet to be released in World Silver Survey
2006, but the fabrication demand is expected to be stable for 2005 and
the expectations for 2006 are 850 Million Ounces.
Page 14 of 31
As per the latest available World Silver Survey 2005 it has been seen that:
• Total fabrication demand for 2004 fell by 2% to a six year low of
836.7 Moz
• Increase in industrial applications rose by 5% especially because
of electronic goods.
• Jewellery & silverware fabrication demand fell to a nine year low at
247.5 Moz by 10%
• Photographic demand fell for 5th year in row, reached 181.0 Moz
• Coin and medal demand increased by 15% in 2004 reaching its ten
year high at 41.1 Moz
• Implied investments rose by factor of five to reach 42.5 Moz in
2004
World Fabrication Demand by Region - 1992 World Fabrication Demand by Region - 2003
In 2004 acceleration in
global GDP growth lead to 5% increase in industrial fabrication. Mostly all
countries saw growth except India saw substantial fall mostly because of
losses in industrial areas. Much of the growth in industrial fabrication was
fuelled by electronics sector which recorded the growth of 15%. The
growth in electronics can be attributes to plasma display revolution in
Japan and United States. It is expected that in electronics China should
record a faster growth but the fact is that China specializes in assembling
the components and not fabricating them. In assembling silver is only used
in soldering and brazing. In consumption of brazing alloys China has shown
a growth of 11% and tops the list of countries consuming highest Brazing
and Soldering Alloys.
Top 5 in consumption in Electronics Top 5 in use of Brazing Alloy & soldering

2004 Rank Country 2004 Rank Country
1 United States (28%) 1 China (25%)
2 Japan (23%) 2 United States (19%)
3 Germany (11%) 3 Japan (9.6%)
4 China (8%) 4 Germany (8%)
5 Taiwan (6%) 5 UK & Ireland (7%)
Page 15 of 31
Photographic fabrication saw a decline due to advent of digital

photography but this decline is uniform. Other areas of photographic
fabrication paper consumption also saw a modest reduction but this
reduction was offset by motion picture sector which has shown a higher
silver consumption than last year.
World Photographic Fabrication Demand by Region 2004
Demand for Jewelry and Silverware fabrication fell by 10% in 2004. This
was mainly due to slump in Indian consumption which amounts to nearly
30% of world’s Jewelry demand. Indian demand for silver fell due to 30%
rise in local prices and poor monsoon. If India is excluded then global
Jewelry and silverware fabrication demand has shown 3% increase mainly
because of exports from Thailand and China.
Top 5 in Silver consumption for Jewellery and silverware
Rank Country 2003 2004
1 India 28% 18%
2 Italy 16% 17%
3 Thailand 14% 16%
4 Mexico 5.5% 6.3%
5 United States 5.4% 6.3%
Implied Net investments of silver have shown 400% increase in year 2004.
Sudden boom in investment activities due to funds, futures exchanges and
heavy purchases by high net worth individuals have lead to this rise.
Coin & medal fabrication rose in 2004 by 15% due to increased buy of
commemorative and souvenir coins in Portugal, Spain, Canada and
United States.
Top 5 in Silver consumption for Medals & Coins Production
Rank 2004 Country
1 United States (35%)
2 Germany (32%)
3 China (7%)
4 Australia (3.6%)
5 Spain (3%)
Page 16 of 31
Thus all these components have their share in creating demand for silver.
Along with these components there exist new technologies like RFID and
anti bacterial medicines may also impact silver demand. Along with this
there is a need to give a special attention to the silver demand of India
because the main factor for fluctuation of silver demand is Jewellery and
Silverware as it is highly sensitive to price and India dominates with around
1/3rd of the jewellery demand of the world.
Indian Industrial Fabrication Demand 2003
Indian industrial fabrication demand comprises mainly that of Silver

plating, Pharmacy and Jari. Still the role of photography in silver demand
of India is minute. An increase in the sector of electrical and electronics is
expected in near future as few multi nationals are looking forward for India
as their manufacturing hub for electronic goods. The demand of silver in
India is very difficult to analyse even for the Silver Survey as there are
many house hold units that use silver in the art of Jari. Due to many players
in the market and different tax regimes it is difficult to estimate total
imports of silver in India. The bottom line is that there have been no major
changes in the market since last few years. The demand side of silver in
India is ambiguous when it comes to “non -industrial” use of silver. This
demand is also very price sensitive especially in India. In India silver
jewellery and silver ware are scraped if there is requirement of money for
agri-business requirements. Even year round fluctuations are seen in
demand depending on the marriage season in India where there is
sudden upsurge is seen in demand of silver. Thus this unpredictability of
silver demand has added to the volatility in demand and eventually prices of
silver.
Page 17 of 31
ETF might change the way we look at Silver

ETF’s (Exchange traded funds) are posing new demand shocks for silver.
This shock has lead to silver price rally in the 1st quarter of 2006. The ETF
shares are backed by silver stored on behalf of the trust. Silver ETFs made a
golden debut and started trading at American Stock Exchange on 28th
April 2006. Prior the start of trading, it was estimated that over 10% of
annual silver demand, or 100 million troy ounces, would be accumulated
by the silver ETF in the first 18 months, this estimation was done in lines
with the trading history of gold ETFs floated in U.S. If this ever happens
such a move would lead to a shortage of silver by 100 million troy ounces
leading to the abnormal price increase. This expectation has been
discounted by the markets and recent silver rally was seen and expected to
stay if the silver shortage further increases.
Silver Prices (Daily) for Jan-06 to April-06
More than expected uptake of silver ETF fund during its initial trading days
gives a hint of an "extremely tight" silver market in the longer term.
Though it is expected that the pace of silver accumulation by investors
would slow down as time passes but still it would result in market tightness
which would be irreversible.
According to the latest World Silver Survey the identifiable inventories of

silver have diminished over the last 16 years from several billion ounces
to less than 600 million ounces. Further accumulation of silver as in case
of ETF’s would result in the liquidity crisis in silver market and the industries
dependent on silver would have to pay heavy price for the white precious
metal for their survival. But at this stage it would be very nascent to talk
Page 18 of 31
about the long term effects of ETF on silver prices but all indications direct
to the continuity of the Bull Run for silver. The numbers of the last 4 days of
trading of silver ETF seem to be very promising. As these numbers keep
growing more and more silver will find its way from the market into the
vaults of the trust and affecting the prices of silver positively, and more the
silver prices rise more will be the NAV(Net Asset Value) leading to higher
returns and higher participation of investors. Thus this cumulative effect
may lead to increase in silver prices and value of Silver ETF hand in
hand.
Date NAV1 Close Fix Premium/ Daily Total Silver in

$ Price Price2 Discount3 Trading Shares the Trust
$/Share $/Ounce Volume Outstanding (Tonnes)
28th April 2006 125.55 138.12 12.6 9.96% 2343100 2100000 653.2
1st May 2006 125.55 138.7 12.6 10.39% 1244500 2100000 653.2
2nd May 2006 139.19 143.65 13.9 3.22% 1251100 3200000 995.3
3rd May 2006 144.19 139.3 14.4 -3.25% 1514100 3850000 1197.4
Demand of paper silver is the demand of silver in form of futures and similar
investment instruments in which the claims are settled in cash and mostly
there is no involvement of physical silver but there is a scope for delivery of
silver which adds to the demand of silver.
World Silver Demand with Price
Silver Price
Estimated
Expected
Page 19 of 31
Long term Outlook for Silver Demand

Factor Outlook Remark
Predicted increase in silver
demand will depend heavily on
Industrial demand is expected to how well the world economy
increase moderately by 5%. performs. If real economic
Industrial Electronics and battery sector is growth is pervasive and strong,
Fabrication expected to drive this increase. Growing then the demand for silver bullion
demand economies like India and China show a could very well exceed current
great propensity to consume and supply. Silver has no substitute in
produce electronic goods. most of the industrial applications
and hence its industrial demand
is price inelastic.
This is the most price-sensitive form
of silver demand, yet you can see that
the total demand, in dollar terms,
actually rose more than 25% in 2004!
Jewelry and silverware demand
Despite higher prices in 2004 and again
causes the fluctuations in the
Jewelry & in 2005, this sector may see an increase
demand and most of it is
Silverware in demand for 2006 compared to 2005.
compensated from the piled-up
Jewelry demand depends highly on
stocks if deficit occurs.
Indian economy and indirectly on
Indian monsoon. If the monsoon of
India in 2006 fair well increase in
demand would be justified.
Despite the surge in the use of digital
photography over the past few years, Though a fall is seen in
photographic silver usage has dropped photographic demand but there is
barely 10% from its 1999 peak. a tremendous demand seen in
Still, photographic silver demand is commercial printing of
Photographic
expected to slide further as the years go photographs as home printing is
fabrication
by. It could fall by as much as 8% in still not cheaper and hence silver
demand
2006 compared to 2005 levels. Some of demand depends on penetration
the fall would be offset by increase of photography in
demand in motion pictures category and underdeveloped countries.
commercial printing. So the net effect
would be fall by around 7%
Silver used for coinage in 2005 rose 5% Coinage demand is mostly
from 2004. As more investors and observed in US, Spain and in
Coinage
collectors purchase physical silver, India it forms the part of Jewelry
demand in 2006 should show another demand. In India it is also an
increase. important gift item.
Due to advent of ETF and boom
Investment demand has grown multi-
in commodity markets the
fold due to sudden attention towards
Investment demand for silver and paper
silver investments. Silver demand is
Demand silver is on highs. This demand is
highly understated and in 2006 it is
expected to keep fuelling the bull
expected to increase by at least 1000%.
run.
Silver has a wide range of uses, from
catalysts, mirrors, brazing alloys, water Due to less price of silver there
purification systems, solders, paints, was basically no research in the
medications, and so forth. As more developing substitutes of silver
research is conducted on possible uses and hence with the depletion of
Other uses for silver, demand for silver for other this non renewable natural
uses is growing faster than any other resource. New inventions in
segment - having doubled in the past 15 medicine and products like RFID
years! Demand soared more than 21% may revolutionise the demand for
in 2004! Expect another 10% increase in physical silver.
demand in 2006
In past decade, the average
The strength of silver demand for new
annual silver price rose 250%
industrial applications will continue to
(adjusted for inflation). Despite
push total silver demand higher in
Total this soaring price, total silver
coming years, more than offsetting the
Demand demand only dropped 30%! The
decline in photographic usage. Because
Outlook price of silver could triple or
silver is such a small component of
quadruple from current levels
many fabricated products, rising silver
with only a modest effect on
prices have minimal effect on demand.
demand in this sector.
Page 20 of 31
Supply Demand Balance Sheets for Silver
1996 1997 1998 1999 2000 2001 2002 2003 2004

Supply
Mine Production 487.90 523.10 543.60 543.20 581.20 590.00 596.40 611.20 634.40
Old Silver Scrap 158.20 169.10 193.70 174.80 179.20 184.20 186.80 183.60 181.10
Supply from Industry 646.10 692.20 737.30 718.00 760.40 774.20 783.20 794.80 815.50
Net Government Sales 18.90 0.00 39.60 95.20 78.10 85.70 61.20 88.20 61.70
Supply 665.00 692.20 776.90 813.20 838.50 859.90 844.40 883.00 877.20
Producer Hedging 0.00 69.10 5.50 0.00 0.00 20.40 0.00 0.00 2.00
Implied Net Disinvestments 146.40 81.90 44.40 67.00 97.80 0.00 26.20 0.00 0.00
Total Supply 811.40 843.20 826.80 880.20 936.30 880.30 870.60 883.00 879.20
Demand
Fabrication
Industrial Applications 297.30 320.40 316.20 340.60 377.10 338.50 341.40 350.50 367.10
Photography 212.00 219.00 225.00 225.90 219.50 210.20 205.70 192.90 181.00
Jewelry & Silverware 263.70 274.30 259.40 273.30 281.40 287.60 265.90 274.20 247.50
Coins & Medals 23.60 28.80 26.20 27.60 29.80 27.20 32.80 35.80 41.10
Total Fabrication 796.60 842.50 826.80 867.40 907.80 863.50 845.80 853.40 836.70
Net Government Purchases 0.00 0.70 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Producer De-Hedging 14.80 0.00 0.00 12.80 28.50 0.00 24.80 21.00 0.00
Implied Net Investment 0.00 0.00 0.00 0.00 0.00 16.80 0.00 8.70 42.50
Total Demand 811.40 843.20 826.80 880.20 936.30 880.30 870.60 883.10 879.20
Silver Prices (Lon US$/oz) 5.199 4.897 5.544 5.22 4.951 4.37 4.599 4.879 6.658
Source: World Silver Survey 2005
Surplus Deficit Mathematics of Silver
Silver Market Surplus/Deficit
Source CPM Group
2004 was the fifteenth consecutive year, when the silver market projected a
huge supply shortage. According to CPM Survey total supplies from mine
production, recycling, and government sales were 750.0 million ounces,
falling 55.0 million ounces (6.8%) short of covering industrial and
coinage demand of 805.0 million ounces.
Page 21 of 31
According to CPM Group the Supply and Demand for 2004 stood at.
Source Millions Oz %
Mines 518.3 69.1%
Recycling 216.7 28.9%
Government sales 15.0 2.0%
Total Supply 750.0 100.0%
Use Category Millions Oz %

Jewelry/silverware 242.5 30.1%
Photography 239.4 29.7%
Electronics/batteries 106.8 13.3%
Coinage 10.5 1.3%
Other 205.8 25.6%
Total Demand 805.0 100.0%
Source: CPM Group Survey
Inventories run to solve the problem:

Since 1990, almost 2 billion ounces of silver inventories have been
consumed to cover supply shortages. By the end of 2004, less than 1 billion
ounces of inventories remained.
Estimated inventories potentially available for industrial and coinage uses

Category (2004) Millions Oz
Comex 107.8
Tocom 0.4
U.S. and Japanese manufacturers 22.5
Bullion in private U.S. holdings 30.0
Bullion in Berkshire Hathaway 129.7
Bullion in private European, Asian, 20.6
and Latin American holdings
Silver coins (primarily U.S. 90%) 508.0
Government holdings 122.7
Total 941.7
Note: The above inventory figures exclude holdings which are consumed
domestically in China, North Korea, and nations forming part of the USSR.
Source: CPM Group Survey
Page 22 of 31
Identifiable Bullion Stock
Source: World Silver Survey 2005
The major source of inventories was consumed in 2004 to cover shortages

came from the Comex, and private holdings in the U.S., Europe, Asia, and
Latin America. These inventories dropped by 27% from year earlier
levels! These are the major sources of silver available to cover continuing
shortages.
Only a look at the inventories that are readily available to cover shortages,
suggest that there is only enough silver to last a few more years!
“One of the misunderstandings common in the silver market is that

there are hundreds of millions of ounces of silver in inventories in
London and Zurich. There is not nearly that much. There may be
between 75 and 100 million ounces in these bank vaults as of early
2006” - CPM Group
Silver is no longer a reserve asset and estimates show that at today's price,
all government holdings of silver combined are worth less than $1 billion so
there is a very little scope for governments to manipulate the prices. As a
result, the price of silver is free to respond to market signals much more
than gold.
Page 23 of 31
Silver and other Precious metals
Prices of Precious Metals ($/Ounce)

Year Platinium Palladium Gold Silver
1996 369.3 124.05 369.2 4.71
1997 370.8 203.15 289.9 5.18
1998 364.5 332.15 288.7 4.73
1999 430.2 449.2 292.9 5.17
2000 609.6 954.45 274 4.62
2001 493 448 277.1 4.11
2002 604.4 238 343.6 4.43
2003 811.3 197.5 418 5.305
2004 863.7 185.25 436.3 6.7
2005 973 261.5 519.7 9.02
Source: Bloomberg Service
Among the precious metals pack silver is the cheapest and hence the
potential to give higher returns is also more. It is very easy for silver to
double from $14 to 28$ in a very short time whereas it is not possible for
other metals to achieve such feat. Another important aspect that separates
silver from its precious cousins is that out of the total mined silver only
2% of silver remains in the stock where as in case of gold more than
85% still remains in stocks. This indicates that silver is consumed rather
than used, and consumption is such that it is not economical to recover it
back.
Stocks of Gold and Silver (billions of ounces)
Total volume mined throughout history Stocks in 2004
Gold 5.5 4.7

Silver 45 1
Source: IFSL estimates based on World Gold Council, GFMS Ltd,
The Silver Institute, Charles River Associates and Silver-Investor data
Gold and Silver: Partners in rhyme
Gold and silver have always been Correlation of Gold and Silver prices
closely associated and so do their

prices. There has been a good
correlation in prices of gold and silver
this recant past. But as the
fundamentals of silver are coming to
forces silver is slowly discontinuing to
blindly following gold. The correlation in
the prices remains but is a decreasing
trend has been observed in gold silver
price correlation.
Page 24 of 31
Gold/Silver Ratio trading Strategy
If we look at the historic ratios between gold and silver it is seen that before
1893 the ratio was fixed at 16:1. Sixteen ounces of silver equalled one
ounce of gold. In 1980 when the both the metals were at the life highs, the
ratio was almost exactly 16 to 1. In past 25 years it is assumed that 35 to 1
is a normal ratio in an unfixed market. This ratio was interpreted in way
that if ratio was under 35 to 1 one should buy gold and if more one should
buy silver. But today’s ratio is close to 60 to 1 which is a strong indication
in favour of silver. If gold/silver ratio merely returns to 35 to 1, silver would
rise 2.4 times faster than gold. If we look at the physical occurrence of
silver and gold in earths crust the ratio is around 17.5:1.
Gold/Silver Ratio and Silver Prices - Jan 2001 to April 2006
Gold/Silver Ratio
Silver Prices
Since Jan 2006 it can be observed that when ever the ratio breaches the
mark of 60 a change in prices of silver can be seen moving in the opposite
direction of the ratio. Understanding the gold/silver ratio makes it possible
to make profitable arbitrage refinements to investments strategy.
• Timing purchases according to ratio. When the ratio is relatively
high silver is favored and when silver is relatively low gold is
favored.
• When the ratios are high gold is swapped for silver and when the
ratio drops again silver is swapped for gold.
• Ratio trading gives benefits like growth in investments, potential
out performance in bull markets.
Analysis of precious metals investments portfolio suggests that the
portfolio must not be skewed more than 70% towards silver. Always
around 30% of portfolio should contain 30% gold.
Page 25 of 31
Fundamental differences between Gold and Silver
Presently most the silver and gold fundamentals are treated in similar
fashion but there are certain striking differences between the two. These
differences would be surfacing slowly and then the fundamentals of silver
will come in to play and prices of silver will no longer follow gold. Gold is
truly a precious metal and silver is more of an industrial metal.
Factor Gold Silver Effect
Stocks in 2004
98 % of silver mined
/ Total volume
till date no longer
mined
exists for reuse.
throughout 4.7/5.5 1/45
Where as 85% of gold
history (In
mined still remains o
Billion
surface.
Ounces)
70% of mined Silver is Demand and supply
Mine Gold is obtained from obtained as by-product economics of other
Production gold mines only from mines of Gold, metals affect the
Lead, Zinc and Copper. supply of silver.
If prices of silver
Production cost of Gold Silver has been priced increase the supply is
Production
has been mostly less since decades below its expected to increase.
Cost
than the prices. production cost. Less price may lead to
closure of silver mines.
Most of the silver has
Deeper the gold mine Deeper the silver been mined out from
Richness of
richer is the ore exploration poorer the the surface and output
Ore
obtained. ore obtained. decreases as the mine
are dug deep.
Silver is a key
ingredient in electronic, Chances of getting
Gold is mostly used as
electrical, photography extinct due to usage
Usage reserves and in
and host of other for silver are much
ornamentation
applications with no higher than gold.
substitutes.
Market size of gold
Market size is small and Opportunities to make
including spot, futures
Market Size relatively less number of fortunes in small
and funds is much
player in the market. market are more.
bigger than silver
Indian demand and role
Indian economy and
in silver markets is Understanding of
demand do not play
significant. MCX (Multi silver market in India
most important role
Role of India commodity Exchange) can aid in capturing
and prices are still
records 2nd highest silver price
governed by foreign
turnover in silver in the movements better.
markets
world.
Thus silver and gold

Gold and Silver Prices - Jan 2006 to April 2006
can no longer be
treated same and the
fundamentals of silver
Silver Prices
have started
overweighing that of
Gold Prices gold and that has been
evident from the
returns posted by gold
and silver in 2006.
Page 26 of 31
Black and White relationship - Crude and Silver
Crude/Silver Ratio and Silver Prices - Jan 2001 to April 2006
Crude/Silver Ratio
Silver Prices
Pricing oil in silver certainly has some validity, but it’s just not as sound as
pricing it in gold. Since 1965, silver and oil have had a 0.698 positive
correlation. This is strong, but nowhere near as tight as the gold and oil
correlation of 0.816 over this same period of time. Nevertheless, silver and
oil have had strong positive relationships and correlations during certain
secular epochs in modern history. During the last secular commodities Bull
Run in the 1970s silver tracked oil nicely and so is the case now in 2006.
From the historic analysis it can be concluded that Silver and oil have a
strong positive correlation during oil bulls and their ratios have a propensity
to trade within reasonably well-defined trading ranges. If the conservative
ends of these ranges hold and even if oil corrects in future, silver prices
still ought to go a lot higher from here based on their historical
relationship with oil prices. And if oil doesn’t correct as much, the
silver picture is even brighter.
As the silver/oil relationship is certainly not the only reason silver prices
should continue their bull market, and it is not even the most compelling.
Yet, it offers one more perspective of analysis that confirms silver’s bullish
fundamentals. As many prudent investors have used the gold/oil
relationship to earn fortunes in the past, a similar opportunity exists
today in silver. And today in 2006 oil and silver are once again in such
secular bull markets. Oil has advanced far ahead of silver, but the
historical relationship between these two commodities strongly suggests
silver will close this gap by catapulting ahead sooner or later.
Page 27 of 31
Long term Price Outlook
Silver is targeting $19-$20 per ounce or

Rs. 28000-30000 per Kg by the end of
accounting year 2006-07.
Factors that may support the Bull Run of silver
• Supply from mine production not able to meet the demand.

• Supply from net government sales on decline.
• Supply from scrap on decline independent of price increase.
• Liquidity of silver in market reduced due to launch of Exchange
Traded Fund (ETF)
• Industrial Demand increasing at greater pace.
• Jewelry demand on increase in India and Thailand.
• Coinage demand to increase.
• Other uses like medicine, water purification etc., add to the
demand considerably.
• Investment demand of silver is highly understated and expected
to grow by at-least 1000%
• Exploration of new silver mines is highly expensive affair and not
undertaken seriously.
• Richness of Silver ore decreases as deep mining is undertaken,
thus proving that the current mine will be exhausting in near
future.
• Increase in consumption of silver in the electronics and electrical
sectors from where the scrap supply is negligible so the scope of
recycling decreases.
• Silver inventories have declined sharply. Inventories that are
readily available to cover shortages, are enough only to last a
few more years.
• Silver's attractive fundamentals bring in substantial new
investment demand.
• Just like gold loves inflation, so does silver love inflation. As silver
bullion helps protect investor wealth and purchasing power. If
inflation ratchet upwards, silver demand will increase, too.
Greater demand means rising silver prices.
• In long term basis Silver, like all precious metals bullion, is
negatively correlated with bonds and stocks. If the prices of
bonds and stocks decline, the price of silver escalates. If this
Page 28 of 31
natural process occurs, it will generate further investor interest in

silver and a rising silver price.
• Precious metals bullion is viewed as an important price stabilizer
in portfolios comprised of bonds, cash and stocks. If stock
markets become volatile, investors will include silver in their
investment portfolios.
• Today’s commodities boom is expected to continue for the
foreseeable future as the Chinese and Indian economies continue
to expand and grow.
• It is an undeniable fact that it is easy for silver to double it price
of $12 to $24 compared to than hefty 3 digit figures of gold,
palladium, platinum and rhodium.
• Institutional investors have become more involved in silver in
2004 and 2005.
• Most silver consumed is also price-insensitive, because such
small quantities are used by industry, that rising silver prices will
not easily slow down the growing industrial demand.
• There are too many paper contracts on the futures exchange
world wide. With over 175,000 contracts for 5000 ounces, that's
875 million ounces of silver, promised to be delivered. The
exchanges have about 1/7th of that in real silver they have
promised. To cover these paper contracts and close them out,
will cause silver prices to move higher. If cash settlement
becomes impossible, then a silver futures default, (also known as
a bankruptcy, or a failure to deliver), will cause silver prices to
explode even higher.
• Due to a long period of low prices of silver there has been
decrease in silver substitution research making silver currently
un-substitutable.
• More silver mines are closing than opening. No silver mining
projects are in pipeline.
• For a long time silver has been priced below its production cost.
• Presently the paper commodity price is determining the prices of
physical silver. A price shock will occur when prices begin to be
set by physical silver availability.
• Total silver market is tiny. It would perhaps take $15 billion
dollars to buy all the remaining silver. Only a few dollars moving
in silver market can cause tsunami.
Page 29 of 31
• Super conductivity technology uses silver to achieve high

transmission efficiency, which is expected to increase the
demand.
• Electro-gas Hybrid cars would require silver in their batteries.
• Gold is accumulated but silver is lost due to its micro usuage
depletion.
It would not be fair to present one side of the silver story so the factors that
might contribute to lower silver prices are
• Due to high prices, price sensitive demand of jewelry and silverware
may drastically decrease.
• Increase in mine production of base metals like Copper, Zinc & Lead.
• Recession of depression would result in less industrial demand.
• Rapid increase in digital photography.
• Discovery of substitutes for silver.
Some important Factors that may affect silver prices positively & negatively
Increase in Base
Metals production
$20 to $XX Many other factors
Recession or
Depression New uses on
increase
Closing Silver Mines
Digital Photography
Fewer Substitutes
Silver prices
ETF’s
Increase in Mine
Production Investment Demand
Increase in Prices of
Gold, Copper, Lead
and Zinc.
Supply Demand
Deficit Positive effect on Price
$13
Declining Negative effect on Price
Inventories
High production Cost
Time Line
Page 30 of 31
Statistical forecast
Statistical forecast generated from monthly averages of silver prices of

London Fixing support the fundamentals and forecasts the value of $20 with
in the time frame of 1 year.
Forecasting tool Double Exponential Smoothing is used. It is a Time Series
Analysis tool that smoothes out the noise in a time series and forecasts data
that exhibit a trend.
Result - Double Exponential Smoothing

Actual
Predicted
25 Forecast
Actual
Predicted
Forecast
15
Smoothing Constants
Alpha (level): 1.310
Gamma (trend): 0.135
MAPE: 4.30613
5 MAD: 0.26969
MSD: 0.16277
0 10 20 30 40 50 60 70
Time
References:
Multi Commodity Exchange (MCX) - http://www.mcxindia.com
National Commodities Derivatives Exchange (NCDEX) - http://www.ncdex.com
National Multi Commodity Exchange (NMCE)
Bloomberg service - www.bloomberg.com
Money line tele-rate - Charting Software
World Gold Council - www.gold.org
ECB Statistics - http://www.ecb.int/stats/html/index.en.html
Bank of England - www.bankofengland.co.uk
Reserve Bank of India – www.rbi.org.in
London Bullion Market Association - www.lbma.org.uk
Silver Institute - www.silverinstitute.org
Chicago Board of Trade - www.cbot.com
Jim Rogers - www.rogersrawmaterial.com
Kitco Charts - www.kitco.com
Reuter’s news service - www.reuters.com
Microsoft Encarta Encyclopaedia
Page 31 of 31

Silver Karvy

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Riding the Silver Bull

Silver is targeting $20 per ounce or Rs.30000 per Kg

“Too many people miss the Silver lining,

Recently a rally in silver followed by sideways movements for sometime

But the fact always remains is that no investment return can be

Silver Prices 1975 - 2006 (Weekly Average)

US$50.36 on January 17, 1980

US$14.27 on April 19, 2006

Source: Bloomberg Service

Significant Events Affecting Silver Prices Since 1950

2006 Launch of Silver ETF by Barclays at American Stock Exchange.

1985 U.S. Mint authorized to begin minting a silver bullion coin

1979- Attempt to corner the silver market by Hunt Brothers

1967 Announcement by U.S. Government that all silver coins would be

1950- Huge U.S. Government silver holdings largely depleted

Silver Prices Jan 2006 - April 2006

Source: Bloomberg Service +57.1%

Gold, Silver Prices Jan 2006 - Apr 2006

Real Price of Silver for past 600 years

All time high $806

All time low $4.73

Silver Supply Dynamics

Like all metals or precisely precious metals, silver cannot be created. It

Below the ground Above the ground

Mine Production Net Govt. Sales Old Silver Scrap

Primary Silver Mines

Lead / Zinc Mines

World Silver Supply 1992 World Silver Supply 2004

Mine production of silver is the largest component of silver supply. It

silver will facilitate in predicting the future movement of silver production

Old Silver Scrap

Net Govt. Sales

Mine production registered a 4% increase year-on-year to achieve a

It is quite evident that mine production is increasing where as old silver

Mine production of silver has registered strong growth and it is estimated

The increase in mine production was at record high in year 2004 at

Decrease in production was observed in Kazakhstan, Bolivia and

Silver output By Source Metals - 2004

Correlation Copper Zinc Lead Gold

Supply from above the ground

Supply from above the ground constitute of Scrap and Government

Disinvestments and government sales comprise of old coins and bars of

In 2004 net government sales were Silver Price

observed to have declined by 30% on y-

Fall in global scrap was seen in 2004 is

saw an increase by around 30%. Scrap

Long Term Supply Outlook

Factor Outlook Effect

The analysis of literature and statistics of various sources of supply of silver

Silver Demand Dynamics

Demand of silver has three main components namely:

Industrial Fabrication Investments

Govt. Purchases Personal Investments

Coins & Medals

Silver demand is governed by various application of silver. Sale of the goods

demand is price inelastic as Bearings Jewellery and Silverware

World Silver Demand 1992 World Silver Demand 2004

World Fabrication Demand of Silver

Jewelry & Silverware

Coins & Medals

Demand of physical silver is mostly due to industrial demand and the

Top 5 in consumption in Electronics Top 5 in use of Brazing Alloy & soldering