Silver Value: The Laws of Supply And Demand
By Marvin Pirila
Silver has the highest electrical and thermal conductivity of any metal, very ductile and malleable. Silver has been used for making currency coins, used extensively in electronic products, and as a catalyst for chemical reactions.
Long valued as a precious metal, silver continues to be used to make ornaments, jewelry, high-value tableware, and utensils such as silverware. Today, silver metal is used in electrical contacts/conductors, and in mirrors. Its compounds are used in photographic film, and dilute silver nitrate solutions/other silver compounds are used as disinfectants and microbiocides. Antibiotics have also supplanted many medical antimicrobial uses of silver.
The supply of silver is affected by its use and ultimate loss to landfills. Silver is consumed on a much larger scale than gold, with greater losses to landfills. This demand and loss give silver its potential value.
Theodore Butler, in "Silver For The New Era," lists causes that may lead to a quick rise in silver prices that include:
1. The Silver Short Squeeze: For more than 20 years far too many futures contracts have been shorting silver value. There is not sufficient silver on the planet to fill all these contracts and once that becomes evident to the masses, speculators might be compelled to buy back their contracts driving silver prices way up.
2. Industry Panic: Silver has thousands of functions in industry and several of these applications do not have a substitute material readily available. As a result, when silver prices start to rise well above silver value today, industrial users will build up their inventories … leading to demand surges and higher silver prices.
3. No More Government Inventories: The U.S. Government has already depleted its silver stock and most other Governments around the globe have performed the same. This means the only sellers of silver inventory will likely be people and organizations that bought and held real silver, and these new sellers will likely be looking to get the best silver prices they can.
Derivative based financial vehicles allow investors to purchase larger amounts of physical silver at exceedingly low prices bringing instability to markets.
There are several claims, in addition to derivatives, being made that the global silver supply is becoming depleted. These claims are made on that basis that silver is hoarded as a monetary metal and consumed as an industrial one. Silver is unsurpassed in terms of electrical conductivity resulting in tens of thousands of electronic and industrial applications presently being used for this metal. Silvers excellent reflective and anti-bacterial properties also makes it a favorite metal of other types of applications. However, the amounts of silver used per application are so minimal, that it becomes next to impossible to recycle silver from any particular unit. Computers, cell phones, and CDs end up in landfills, their minute amounts of silver cannot be recovered and are lost forever. Some sources claim that, in the last century, approximately 90% of global silver inventory has been consumed and depleted forever. This claim fails to account for the possibility of new silver mines being discovered, improved mining techniques, and alternative metals/techniques being substituted for silver in various products. The use of silver has already plummeted in its use in both silverware and photography, both major users of silver.
The claim that silver has experienced an ever increasing rate of depletion for the last 60 years, fails to take into account the increase in mine production and recycling. Recycling is more of a recent phenomenon, and wasn't a practice seen to this level in the majority of this 60 years.
No known government reserves of silver exist anymore in the world, even though gold is still stockpiled by central banks around the world.
The Coming Supply and Demand Shock in the Investment Community
There are approximately 12 ounces of silver in the earth to every ounce of gold. This is what is termed the 'natural ratio' between gold and silver. Some sources claim the monetary ratio has historically been approximately 16 silver ounces to one ounce of gold, yet you would have to go several decades back to come up with that figure. In fact, the ratio between silver and gold since 2001 has been 45:1 to 62:1. The average over the last 11 years has been 60:1, nowhere near the 16:1 being cited by several sources.
Silver to Gold Demand
A lot of reports show the expectations of silver prices soaring, possibly higher than gold. The fact is that over the last 11 years, the ratio of silver to gold demand has ranged from 6:67:1 to 7.86:1. This is a relatively stable ratio, considering silver supply has remained mostly stable (45:1 to 62:1). If you leave out the 45:1 ratio for 2011, the silver supply ratio to gold range from 52:1 to 67.1. It is deceptive to compare this decade in time to that of history, as the economic and social strife of this period is unlike every other. The debt to GDP of countries around the world has never been so high, Greece remains in continual financial turmoil, and the U.S. is struggling on every front. The U.S. federal reserve is printing an unprecedented amount of cash and the national debt will reach nearly $21 trillion by the end of 2012. If there is any driver pushing the price of precious metals, its the uncertainty of paper currency holding value, the low return on cash savings, and the ongoing inflation numbers. High unemployment, gas prices, and food prices only feed the turn to precious metals. Silver is more affordable than gold and as gold moves, silver moves similarly.
Silver to Gold Mining Production
From 2001 to 2010, the ratio of silver to gold mining production has ranged from 6:45 to 8:45, with the highest ratios in recent years.
Inflation Calculations Changed in 1980
The method of calculation for inflation makes levels seem more acceptable than they really are. The true inflation adjusted high of 1980 is approximately 3 times the presently used official calculation.