February 19, 2012
BY: Robert Hallberg, Topics: Silver
The strong fundamentals of silver have made a lot people bullish on the metal. There is strong evidence of supply and demand imbalances, possibly making silver the the investment of this decade to quote Eric Sprott. Nevertheless, there seems to some disinformation about silver and the silver market and I plan to uncover some these myths in this article.
True or False: There is currently more gold than silver on the market
Yes and no, there is roughly 20 billion ounces of above ground silver but a lot of this metal has already been used in industrial products, silverware, electronics, and art among other things. There is only about 2 billion ounces of investment grade silver available, which includes silver coins and bars. But there is about 5 billion ounces of investment grade gold available, so people who claim that there is more silver than gold are correct if they are referring investment grade material. Inventories are low because silver is an industrial metal, constantly being consumed, while gold is primarily a monetary metal used in jewelry or stored in bullion form. There is currently a 6 month supply of silver and a 40 year supply of gold above ground.
Still, there is almost 9 times more silver than gold brought to the market every year, yet the ratio between these metals is currently 50 to 1. Up until this point, the price of these metals has been determined by buying and selling on the Comex and not through real supply and demand of the physical product. The chart below compares the annual rate of production of gold, silver, and platinum.
True or False: Inventories of silver are extremely low and shortages are developing
Inventories of silver are running very low and all US Government stocks have already been depleted by continuously filling shortages in the market. In 1950 there were 10 billion ounces of above ground silver in inventory. That stock has shrunk to 2 billion ounces. To further illustrate this point, when Eric Sprott made his $580 million dollar purchase of silver to launch his new silver trust (PSLV), it took 2 months to get delivery and most of the bars he received were manufactured after his order. The chart shows a comparison between silver and gold over the past 60 years.
True or False: A ramp up in production will solve the shortage in silver
It is true that silver production is growing and more exploration projects will come online as prices continue to rise. However, demand for silver has been rising faster than or just as fast as the ramp up in production, and only through recycling of scrap silver has the industry been able to keep up with demand. The chart shows mine production versus total demand for silver.
More scrap silver will me melted down and come to the market as prices rise but there is a limit to how much scrap silver will be made available. A lot of it was already melted down during the last bull market in the early 1980s. Other sources of scrap silver are found in artwork and religious items and those will probably not come back into the market. It would not make much sense to meltdown a $5,000 antique to recover $400 worth silver.
True or False: Photography is killing the silver bull market?
Digital photography has undoubtedly reduced the demand for silver. However, most of the silver used in photography was already being recycled; making it a zero sum game without a real change in available inventories. Furthermore, when this myth was first told the price of silver was around $4 and it recently hit $48. The chart below shows the different components of worldwide silver demand.Chart world-silver-demand.jpg
More reasons to be bullish on the price of Silver
Silver have many attractive characteristics and its being found useful in more and more applications. It is currently being used in bandages, batteries, brazing, soldering, cell phones, computers, satellites, solar panels, lasers, digital technology, clothing, electronics circuit boards, ink, water purification, wood treatment, antennas, RFID chips, and passports, among other things. The increase in the demand for silver in food packaging products, water purification, and energy alone is estimated to exceed production by 2017.
The chances for a real shortage in silver are growing by the day. This is significant because the price of silver in most industrial applications is in inelastic. For example, a $3,000 refrigerator may use about $12 dollars worth of silver but without it, that refrigerator is useless. Even a 10 fold increase in the silver price would not change anything. The amount of silver used in that product still only represents a fraction of the total price. So if a shortage really starts to develop, manufactures that typically dont stock a lot of inventory might decide to come into the market and buy as much as they can to keep inventory on hand.
Then you have the public, most of which arent wealth and dont have the capital to buy gold. Yet they want to protect whatever wealth they have; making silver and attractive alternative to gold. Whether manufactures of silver or the public will rush into the market remains to be seen but the outlook for silver looks good regardless.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.blog comments powered by Disqus