The Lay of the Silver Landscape
Right, so you’ve made it clear that you don’t want to wait until next week for clarity on my previous posting (judging by the number of emails people have been sending me).
Remember, I did say one of the hallmarks of successful investing is patience……….
……..but I do get that you want to understand the positioning now, so you can begin to make informed decisions. So sit back and grab a coffee. Here goes.
As with all things financial, there’s loads of data available. The trick is being able to sift between that which is useful and that which belongs in the bin.
So back to basics, supply and demand and two specific issues that are critical to understand.
Up first: The industrial use of silver. Demand has been flat or falling from a number of industries that use silver, such as household demand (like cutlery and candlesticks) hasn’t risen in ten years. Jewelry is up marginally but nothing of any significance. Digital photography and image storing has seen its use in film processing falling.
So what’s catalyzing the growth for industrial demand?
Uses for Silver Are Increasing
Research shows that since 1999, consumption in electronics has increased 120%. It’s uses in solar panels is up 640% since 2000 when it began. Since 2002 it’s even used in anti-bacterial agents an industry which whilst its total silver usage as a percentage of total silver use is small, it has grown 600%.
The point is that its uses are growing and existing demand within each industrial use is growing as well.
Why is this important?
Well, traditionally, if the economy is ‘soft’ then the price of silver tends to go down because of the slowdown in its commercial uses which cause an increased supply.
That said, because of the increased demand industrially, a floor under the price of silver is likely to be more prevalent going forward. By way of example, the Silver Institute forecasts that total industrial use of silver will rise by approximately 36% over the next five years to 666 million troy ounces/year. That’s one hell of a lot of silver! More significantly, it suggests that the portion required to satisfy current industrial demand levels stand at least at 60% of all fabrication (i.e. what comes out of the ground).
Do you think that is likely to increase, or decrease? My own view is that isn’t going to decrease anytime soon, hence the floor in the price.
So what does Demand’s lifelong partner have to say about all this?
Mine production of silver has been increasing over the past decade or so, mostly down to rising prices. This makes it sensible and profitable for mining companies to ramp up production thus bringing more of the metal to the market.
Simultaneously, total demand is rising……….
Supply Cannot Keep Pace with Demand
Despite an increase in mining production, supply can’t keep up with demand. When that happens, an increase in prices ensues.
There is an additional factor to consider here however and that is the ‘scrap’ silver market which is increasingly being used to fill the gap.
So does that mean the price ‘floor’ you talked about earlier doesn’t exist?
In short, no. While scrap metal comprises about 20% of total supply, many of the new applications and uses for silver commercially are difficult if not impossible to reclaim and redistribute.
Some applications contain such a small amount it would be uneconomical to reclaim (the biocidal and nanotechnology applications). With others, it takes a long time so cannot satisfy demand now. Solar panels by way of example have a 20-30 year life span. Others require more efficient methods of recovery, such as silver found in mobile phones, tv’s laptops and other electronic devices. Much of that goes straight back into the ground via landfill.
So in effect, it’s gone or at the very least won’t be useable in the near future. And this is happening when new uses for silver are being found every day, particularly within biomedical sciences.
So the value of scrap metal will also increase in line with higher prices. Refineries will (and are already) expanding their operations to keep up with the demand for increased supply of the metal. It’s more economical to recover scrap silver when the price has doubled; manufacturers have an increased incentive to regain when they get a bigger return on their endeavours!
So what’s the bottom line? The recycling of scrap has to grow to accommodate the increase in demand. Because it’s unpredictable, it can’t be relied on to fill supply gaps.
What also needs to be considered is that the sudden rise in silver is not just about its industrial uses but also it’s relationship with gold and its growing role as a monetary metal resulting from investor fears about the global economy – hardly surprising when you consider the uncontrolled debasement of the world’s major currencies (Helicopter $BEN$), rising inflation and the sovereign debt crisis engulfing Europe.
Most notably, silver is gaining monetary status in emerging economies. Demand is growing three times faster than the established economies of the industrialized countries.
A new thing? Absolutely not. Silver has been used as a medium of exchange (money) for over 3,000 years and the literal translation for money in a vast array of languages is…… guess what? Silver.
I think we’re clear on the big picture: both supply and demand are bullish for silver and more and more investors are turning towards silver for protection against inflation and the debasement of currencies (more worth less). Put into the mix that most governments have no silver reserves. That little recipe makes for nice Silver Bull market well into the future. My advice……get some of your portfolio at least into silver.