• Physical silver demand seen at 1,064.60 mln oz, down 9 pct
• Physical deficit seen at 52.2 mln oz vs 124.0 mln oz
• GRAPHIC-2016 metal returns: tmsnrt.rs/2eqHKkL

London: Physical silver demand hit a four-year low this year as higher prices and weaker consumer sentiment put people off buying jewellery, coins and bars, GFMS analysts at Thomson Reuters predicted on Thursday.

A drop in mine output is expected to have helped keep the market in a physical deficit, GFMS said, but the shortfall is forecast to shrink by nearly 60 percent.

“The silver market is expected to be in an annual physical deficit of 52.2 million ounces in 2016, marking the fourth consecutive year in which (it) has realized an annual physical shortfall,” GFMS analyst Johann Weibe said in the report.

Silver prices have risen by nearly a quarter this year after three years of decline, as expectations for further U.S. interest rate hikes faded and worries over Brexit and the U.S. elections lifted demand for the metal as a haven from risk.

Buying of silver-backed exchange-traded funds to cash in on rising prices and an increase in exchange inventories, pushed up the silver market’s overall net balance, including these two factors, to 185.5 million ounces. That is the biggest shortfall since 2008.

Silver-backed ETFs are expected to have seen inflows of 71.4 million ounces this year, GFMS said, while inventory stocks are tipped to have risen by 61.9 million ounces.

Sales of jewellery and silverware, the largest single segment of physical demand, are expected to have dropped to 257.6 million ounces, GFMS said, their lowest since 2012.

“A decline in discretionary spending, thrifting, lower economic growth and a higher silver price have all contributed to the overall decline,” Weibe said.

Sales of silver coins and bars, which leapt to a record 292.4 million ounces last year, are seen falling by nearly a quarter to 222.0 million ounces in 2016.

Bar demand was hurt particularly by a weaker Chinese economy and lacklustre consumer sentiment in the United States, GFMS said, though worries over Britain’s vote to leave the European Union should lift European demand by 14 percent this year.

Coin and bar sales are still expected to account for more than a fifth of silver demand this year, however, up from 5 percent a decade ago.

Silver demand from the photovolataic sector is expected to have risen 11 percent to a record high of 83.3 million ounces, driven by an increase in global solar installations.

Mine output eased to 887.4 million ounces this year, the group said, after 12 straight years of record highs. That would still be the second highest on record.