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GFMS produced the report for the Silver Institute published last week.   We have used this as a basis for this article on silver supply and demand in the last three years.  Our objective in this piece is to have recent history confirm what we expect of the future for silver.

Industrial demand

The first fact that jumps off the page is that the future for silver looks remarkable with industrial silver demand rising from 15,160.19 tonnes [487.4 million ounces] in 2010 to 20,712.29 tonnes [665.9 million ounces] in 2015.

Much of the growth in the global total of industrial silver consumption will be driven by stronger demand for a number of established uses including the manufacture of electrical contacts and the use of silver in the photo voltaic industry.    New uses center on silver's antibacterial qualities, while other new uses tend to make use of its conductive properties, including solid state lighting and Radio Frequency Identification (RFID) tags.  Overall please note that silver’s importance in the technology of the day is huge.   We go so far as to say that the demand from silver has transformed from a want to a need!   Whether we are in a boom or bust silver’s demand will remain robust.   It is now needed to make all facets of an economy run well and at all levels, even down to individual needs.   This secures its future and assures us that silver prices are well supported.  Here is the list of the amounts used in different applications that emphasize this point.

-        Cell phones used 404.35 tonnes [13 million ounces] of silver last year.

-       Computers consumed 684.29 tonnes [22 million ounces].  

-       Thick film PV consumed 1,461.90 tonnes [47 million ounces] in 2010.

-       Automobiles which used 1,119.75 tonnes [36 million ounces] of silver.

-       Electrical and electronics demand for silver reached an all-time high of 7,555.21 tonnes [242.9 million ounces].

-       Solar Power in 2011 is expected to reach 2,177.29 tonnes [70 million ounces], up 40%.

-       RFID tags in 2010 reached between 31 and 62 tonnes with a long way to go before reaching full market.

-       Water purification used 62 tonnes [2 million ounces] set to grow to 74.65 tonnes [2.4 million ounces].

-       Medical applications may grow strongly to reach 93.3 tonnes [3 million ounces] by 2015.

-       The use of nano-silver in goods packaging and hygiene combined would consume 124.4 tonnes [4 million ounces] of silver over the next five years.

Silver is consumed

While photographic use of silver allows for the re-cycling of silver, reclamation of silver from most of the above uses is difficult to nigh-on-impossible.   This in itself assures either a constant or rising demand for these applications.  

Of particular note is the growth in Asia where we are watching around half of the globe’s population developing at infrastructural level as never before.   This growth will continue at double figures, per annum for at least the next decade.  

Gold is rarely consumed as it is deemed far too valuable.   Reclamation efforts relative to the value of the gold ensures that scrap merchants will go to extraordinary lengths to recover the gold.   In silver’s case these efforts would cost more than the sale of the silver so used.   As the silver price rises further reclamation efforts will become profitable and more silver will be recovered, but we are still a long way off from that day.

Investment demand

HSBC, the world’s largest bullion dealer [in both gold and silver] is confirming that silver’s role as a monetary metal is gathering the most momentum, particularly in emerging economies.  They say that the macro economic trends from emerging markets are positive for both gold and silver.    They put the growing Chinese middle classes [now well over 400 million people of the 1.3 billion Chinese citizens] as fueling an “explosive” growth in demand for silver as a hedge against fast rising inflation.   The Industrial and Commercial Bank of China, the world’s largest bank by market value, agrees this.   I.C.B.C. sold 13 tonnes [418,000 ounces] of physical silver to Chinese citizens in January, alone, compared with 32.97 tonnes [1.06 million ounces] for the whole of 2010.   

We have seen China turn from an exporter of silver to a huge importer in the last three years.   And that’s just the start!   China was a net importer of over 3,110.42 tonnes [100 million ounces] of silver last year, whereas while it was selling ‘official’ holdings of silver only a few years ago it was exporting an equal amount annually. 

China’s ravenous new demand for silver as a store of value in inflationary times is growing exponentially. This is illustrated by the fact that silver imports last year increased four-fold over 2009.

Supply

While we don’t yet have the numbers for supply of silver in 2010 we do not expect them to have risen more than 10% over 2009 levels [in the Table above].   Once we have these we will pass the information onto you.

With 70% of silver mined as a by-product of base metal mining there is a danger of demand outstripping supply.   The present sources of by-product silver are operating at peak capacity.   Pure silver producers like Silver Wheaton are growing but unlikely to be able to fill the gap.   Mines like Coeur d’Alene which is becoming a 50% gold and 50% silver producer do have a considerable capacity for growth and will do so.   But again with demand burgeoning on both the investment and industrial sides supply will find it difficult to meet demand.

Another difficulty for supply is that they are inflexible because of their dependence on mining.   We do foresee rising scrap sales from the developed world where the sight of a profit on jewelry etc, can prove too tempting to the individual, but we cannot see this being more than 10 to 20% more than in 2009.   In the emerging world such a concept is basically foreign to them because both silver and gold represent financial security to investors there.  

If the developed world were stable and if the emerging world was used to their newfound wealth, and were their history not as close to social rupture as it has been and could be, emerging market investors would probably not trust gold and silver as much as they do now.   But that is the case now.   We believe [if history is to guide us] that it will take at least another generation [25 years] of wealth and stability in the emerging world for this attitude to change.   Until then scrap supplies from the emerging world will remain at extremely low levels.

Prospects for the Silver Price 

In 2011 we are seeing prices far above those imagined three or four years ago.   But then the world is facing far more uncertainty and instability that was ever imagined then too.   The decay of currencies ability to measure value has been increasing over that time too, making the soaring prices of silver and gold to become more than plausible.   Indeed a strange feature of the silver price has been it moves with gold as though tied with a piece of elastic string to the gold price, rising higher and falling lower at each move.   So why does it not move more like copper or another base metal used as a simple commodity?   And where, if it doesn’t move like them, is it headed?

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