By Chris Shaw

Trading in the silver market in 2010 was volatile, with prices struggling to break US$19.00 per ounce for much of the year but racing higher in the final months to push above US$30.00 per ounce on the back of strong investment demand.

The actions of investors are continuing to drive the price trajectory of silver according to Barclays Capital, but the group notes when this interest wanes trading in the metal will again be driven by industrial demand.

This is important, as on the view of Barclays the current risks presented by silver's fundamentals are likely to outweigh the potential upside drivers. While fabrication demand is likely to increase, Barclays expects the market will continue to remain in surplus as mine supply should also grow.

On its numbers, Barclays estimates a surplus for silver in 2011 of 2,804 tonnes, up from its forecast surplus for 2010 of about 2,500 tonnes. Credit Suisse is less bearish, expecting silver to be in a slight deficit this year and through 2014.

One part of the silver market that could deliver long-term growth in demand is from an increase in the uptake of solar energy, as Barclays points out silver is used in crystalline silicon photovoltaic (PV) cells, which require highly conductive material on their surface.

A cheaper alternative to PV cells are thin-film cells, which are not made of wafers and contain little if any silver. Thin-film cells are also less efficient, delivering 8-12% efficiency against 14-20% for silicon cells.

While thin-film cells are gaining some traction in the market, Barclays notes PV cells still represent about 90% of all solar cells produced. If it is assumed around 0.1 grams of silver are used for each watt generated and each panel has the capacity to generate 200 watts, this suggests an average solar panel could contain as much as 20 grams of silver.

Barclays estimates this equates to more than 800 tonnes of silver being employed in cells in 2009, which translates to about 8% of silver industrial demand and 4% of global silver supply. On the group's numbers this had the capacity to double in 2010, while Barclays estimates silver usage in solar panels could hit 2,000 tonnes by 2012. This would equate to about 7% of global silver output.

At present solar power contributes only around 1% of global electricity generation, this a reflection of relatively high costs. This leads Barclays to suggest that, short-term at least, solar panels are unlikely to drive the demand story for silver.

Longer-term the view is more positive, as Barclays suggests the pledges of both China and India to increase solar capacity to 30GW and 20GW respectively by 2020 implies the solar industry could generate some industrial support for silver prices as investment demand takes more of a back seat.

In terms of price forecasts for silver, Barclays expects prices will average US$29.10 per ounce in 2011, which would be up from an average of closer to US$20 per ounce in 2010. Citi is a little less bullish in forecasting an average price this year of US$24.90 per ounce, easing to US$23.03 per ounce in 2012 and US$20.53 per ounce in 2013.

Macquarie is not far off the Citi forecasts with its estimates of average annual prices for silver this year of US$26.50 per ounce, US$22.50 per ounce in 2012 and US$19.90 per ounce in 2013, while Credit Suisse has forecasts of US$22.00 per ounce, US$21.00 per ounce and US$21.00 per ounce respectively for 2011-2013.

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