Silver To Drop To $34 UBS

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    Wealth Management Research 26 April 2011

    SilverDefying gravity

    Silver prices temporarily reached an all-time high at USD49.8/oz, bringing the gold-silver ratio close to 31 times.

    We view the price run-up in silver as excessive. On the backof firm industrial demand, financial demand has been ableto balloon prices.

    While further advances in the short run cannot be ruled out,

    we do not expect current levels to be sustained, and we tar-get price setbacks to USD 34/oz over the next 12 months.

    In bubbling territoryThe latest price advances to all-time highs are excessive, in our view.The silver price has appreciated more than 150% y/y and almost50% ytd, thereby outpacing precious metals and real assets by awide margin. Silver prices are prone to excessive price swings. Mineoutput is very price inelastic. In 2010, mine production contributedonly 3% to total supply growth. Scrap supply, which accounts for20% of total supply, is largely indifferent to prices as well. Mostscrap supply is related to fabrication/electronic goods, and is rather

    constant. Therefore, last year's unusually large 5.5% contributionto total supply growth is not likely to be repeated. To balance themarket in 2011, this leaves the job to silver hedging activity by silverproducers or to the demand side. Hedging wise, we have seen asizable jump in activity as by-product producers of silver began tolock in higher prices. We think this development will be repeatedthis year, but it should not be enough to calm markets. Hence, de-mand growth needs to be curbed. This begs the question of whentrend-following investment demand will start to cool. We think thisis unlikely to change unless we see economic activity soften materi-ally and industrial demand retreat. Hence, the present price bubblecould persist long enough to move near USD 55/oz. Over the next12 months, however, we expect a sizable retreat in the silver price

    toward USD 34/oz.

    Mark Bulsing, strategist, UBS AG

    Dominic Schnider, analyst, UBS AG

    Market data and forecastsSpot 45.9

    3M futures 46.0

    Volatility 38%

    3M forecast Sideways 36.5-55.0

    12M forecast Bearish 34.0

    Source: Bloomberg, UBS WMR; Exchange: Comex

    Silver priceIn USD/ounce

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

    Silver: Spot Contract 55-Day Moving Avg. 200-Day Moving Avg.

    Source: Bloomberg, UBS WMR

    Silver price in nominal and real termsValues in USD/ounce

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    Nov-71 Nov-76 Nov-81 Nov-86 Nov-91 Nov-96 Nov-01 Nov-06

    Silver price inflation adjusted Silver price in nominal terms

    Source: Bloomberg, UBS WMR

    Historical performance (in %)

    Underlying -1 m -3 m -12 m ytd

    Gold 4.8 11.3 29.9 5.4

    Silver 23.2 66.6 151.4 48.8

    Source: Bloomberg

    This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 2.

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    Appendix

    Terms and AbbreviationsTerm / Abbreviation Description / Definition Term / Abbreviation Description / DefinitionBackwardation A situation when spot prices are above future

    prices

    CBOT Chicago Board of Trade

    CFTC Commodity Futures Trading Commission COMEX Commodities Exchange (New York)

    Contango A situation when spot prices are below future

    prices

    CRB Index Commodities Research Bureau Index

    DJ AIG Index Dow Jones AIG Commodity Index D.O.E Department of Energy

    E.I.A Energy information Administration Excess Return The most common type of return on the

    commodity indices which is defined as: Excess

    return = spot return + return on rolling the

    futures

    GSCI Goldman Sachs Commodity Index I.E.A International Energy Agency

    LME London Metal Exchange MGMI Index Metallgesellschaft Metals Index

    Natural Gas HB Natural Gas Henry Hub NYBOT New York Board of Trade

    NYMEX New York Mercantile Exchange OPEC Organization Petroleum Exporting Countries

    RICI Rogers International Commodity Index U.S.D.A United States Department of AgricultureUSc/lb USc per Pound USD/BBL USD per Barrel

    USD/GL USD per Gallon USD/MMBtu USD per 1 million British Thermal Unit

    USD/MT USD per Metric Ton USD/oz USD per oz, (1 oz = 31.10 grams)

    WTI Crude Oil West Texas International Crude Oil

    Silver

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    Appendix

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    Silver

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