As the market fixates on the price of oil and other real assets, a dramatic scenario is building on the silver market. More than two billion ounces of silver have disappeared from the market over the last ten years and we could be facing an annual shortage of more than 100 million ounces by 2020.
Not only is the demand for silver surging and annual supply growth going nowhere but much of our available silver is being buried in public landfills. As a major component in batteries, CDs, circuit boards, and other electronics, people are literally throwing their silver in the trash.
That may be something they regret as the world runs out of silver and prices skyrocket.
Silver Demand Is Surging And Cannot Be Stopped
Even as our supply of silver disappears from the market, demand is building every year. Demand for tons of silver is mostly from three important categories; investment, jewelry, and industrial uses. These three categories make up 95% of silver demand and they are growing at a strong rate every year.
Demand for all three major uses of silver has increased over the five years since 2009 but the real story is in the growth in investment and industrial uses. Investors have rushed to silver as central bankers around the world print money to cover spending, destroying the real value of currencies. Demand for silver coins and bars has jumped at an annual pace of 17.5% over the period.
The surge in investor silver demand as a safe haven asset is nothing new. When the U.S. dollar lost half its value from 1971 to 1981, the price of silver rose five-fold. The demand for silver coins jumped 63% to a record 65 million ounces in 2008 as the global financial system collapsed. The market meltdown sent silver prices up more than 37% from 2008 through 2010.
While the annual growth in silver demand for industrial uses has been more modest (1.9%), more than 57% of total demand goes to industrial production. Silver is used in the production process of nearly every industry from electronics to homebuilding and medicine and silverware. Demand for silver in photovoltaics for solar energy applications is bounding higher, up 7% in 2014 and up 99% since 2009. Even slower growth in demand amounts to huge physical demand, more than 11 million ounces in 2015.
This growing industrial need is an urgent demand. While people may be able to substitute their jewelry demand for silver with another metal and investors may be convinced to sell at higher prices, industrial demand is non-negotiable. The growing need for silver in our industrial progress will not be stopped.
Silver Supply is Shaky and Supply Shocks Abound
In comparison to the rapidly rising demand for silver, especially in investment and industrial uses, the annual supply of silver is much more questionable.
In the past, sales of silver holdings from governments and scrap could fill the gap between higher silver demand and slow growth in mining. The U.S. government alone dumped more than five billion ounces of silver onto the market since World War II to keep prices subdued. The growth in investment demand over the last five years means nobody wants to sell their scrap silver, reducing the annual supply from scrap by 33 million ounces.
The bigger story in the supply picture though is the complete sellout of government holdings. Governments around the world sold 44 million ounces of silver in 2010, supplying more than 4% of the market and keeping the price from rising. Governments have all but sold out of their entire silver holdings and we’ve now lost an important source of supply.
Government silver holdings have fallen 75% to 78 million ounces from over 316 million ounces in 2005. There were no government sales of silver in 2014 and none are expected in 2015 when official numbers are released. Those controlling the remaining government holdings of silver can see the developing deficit in supply and demand as well as anyone. They’re holding on to what little silver stockpile is left for when the silver crisis erupts into higher prices and silver spot price. The disappearance of supply from government sales and scrap has put the entire weight of silver supply on mine production and the outlook for mine production is not good.
As the price of silver and other metals has come down over the past few years, miners have drastically pulled back on their development spending. Near-sighted silver mining executives have cut billions from development plans in order to protect cash flow. This represents the bottom of a cycle that gets repeated every ten years without fail. A mining boom causes production to increase and prices to come down which leads to cuts in development spending in silver reserves. Existing mines are tapped out and fewer new mines are developed, leading to a steep drop in mine production of metric tons which leads to surging prices.
Not only is the total supply of silver in question but the sources of mining supply are not nearly as stable as you might think. More than 80% of the world’s mining silver comes from just nine countries, seven of which are considered less developing emerging markets.
Most of these countries, especially those in Latin America, have been slammed by falling currency values and plunging oil prices over the last year. Besides cutting back on overall development spending, miners are getting out of risky markets like Peru, Mexico, and Russia where government resource taxes and central banks could be going up to cover budget deficits.
The volatility in mining and employment almost always leads to large scale protests and mine closures as governments fight with mining syndicates over profits. Just the 15 largest silver mines produced 20% of the world’s mining production in 2014, with all but three of the mines in politically risky and unstable countries. Any sudden stoppages in production could seriously affect estimates for silver supply.
Peak Silver and Surging Prices
The silver market is perennially in deficit with demand outstripping supply by millions of ounces. While the annual deficit hasn’t become a full-blown crisis yet, it may not be long before the headlines start inciting panic over the shrinking supply.
Silver supply from mining and the market won’t be able to balance itself with government sales or scrap as it’s done in the past. Investors are already rushing in to buy and hoard their silver in anticipation of higher prices over the next few years.
The silver crisis has already manifested in coin production but is about to get much worse. The U.S. Mint announced in 2010 that it had run out of silver bullion and was forced to suspend production of 999 fine silver American Eagle Silver Proof coins.
If these trends in silver supply and demand continue, we’ll face a dramatically worsening scenario in just a few years and could run out of silver by 2020. Silver demand is set to increase to 1,466 million ounces by 2020 on its 5-year pace of growth. Even if miners can continue to eke out growth in tons of gold, an unlikely outcome on reduced mine development, the supply of silver is only expected to grow to 1,079 million ounces through 2020.
The above-ground inventory of silver stood at 1,808 million ounces in 2014 but more than 635 million ounces of this was held by exchange-traded funds (ETF). Those holdings won’t be available for use as investors will hold onto their silver, guarding it as prices climb higher.
Removing the silver in ETF storage and using available inventory to offset the annual expected deficit between supply and demand, the global market could run out of silver by 2020. The global silver market could be facing a deficit of 126 million ounces a year by 2020. That deficit will have to be filled somehow. Demand for silver in industrial production is not going to slow down but will look to fill its demand from the only available source besides mining, investors. The growing problem of scarcity will send silver prices surging to convince investors to see their holdings to industrial users.
The silver shortage will affect nearly every aspect of your life, causing shortages and higher prices in home goods, medicine, and industrial products. The only way to protect yourself and even benefit from the coming crisis will be to add silver to your portfolio of safe-haven assets now. As the silver crisis develops, holding the metal may evolve from an investment to a necessity for protection against runaway prices and uncertainty.
Silver is Now More Precious Than Gold
Silver is now rarer than gold and will be for all eternity. From this point forth we work from current silver production alone and, from this point forth, demand will outstrip production without exception.
The crisis deepened. What crises do you ask? Well, starting about sixty years ago, we began to accelerate our usage of silver for industrial purposes as the great industrial complex known as America grew, so did its appetite for silver and other industrial metals. In fact, it grew at such a pace that we devoured the above-ground stockpile of silver at such a rate that it now is gone. That’s right, what took the entire world over five thousand years to acquire, was used up in just six decades, and the above-ground stockpile has been completely eliminated.
Silver differs from gold in several important ways. Most notably is that unlike gold, silver gets used up and is then gone forever. Almost all of the gold ever mined in mankind’s history is still here. We don’t really use gold for anything other than money or as a store of wealth and for decoration like jewelry. Silver gets used in all kinds of industries. It’s natural antibiotic properties make it a wonderful instrument in the medical field.
It is used in military applications; it’s used in all kinds of electrical switches, relays, and batteries. It’s used in water purification systems and paints, and as a primary component in the photographic industry. Silver doesn’t corrode and has excellent thermal conductive properties. Silver, like gold, has also been used, (and continues to be used) as a monetary instrument for centuries. Moreover, as India and China continue their unparalleled advance into joining the ranks of the industrialized world, the situation will be further exacerbated.
As the dramatic increase in industrial demand was not enough of a problem, the plot thickens. Silver is now being rediscovered as an investment vehicle. Perhaps most recently, and for sure most notably, is Barclay’s new silver Exchange Traded Fund. Barclay’s ETC (and others as they have been introduced) has recently pulled an incredible amount of silver off the market.
Constraints in Supply
Why can’t we just mine tonnes more silver? The reason we cannot “fix” the problem by mining more silver is the cost. Today, for example, to mine gold, it takes $350 (to $450) to mine, refine, and bring to market one ounce of the yellow metal. With gold trading around ($1200) an ounce, that is a profitable endeavor. Silver, however, is mined (primarily) as a by-product from the earth's crust. In order to mine one ounce of silver as a primary metal, the cost associated with it is similar to the cost of mining one ounce of gold and with silver trading around ($17-$18) an ounce and would not even be close to profitable when the mining costs are factored in. Currently, we mine around six hundred million ounces of silver each year while the industry consumes about eight hundred and seventy million ounces. Can you see disparity developing? The market is tightening.
Historical Silver Gold Ratio Favors Silver
Historically, the silver to gold ratio has been fifteen to one. It would typically take fifteen ounces of silver in the silver ratio to buy one ounce of gold. Today, with silver trading at approximately ($17-$18) an ounce and physical gold at around ($1175-$1225) an ounce, it takes (65-70) ounces of silver to buy one ounce of gold. This suggests an obvious opportunity as once this ratio (reverts to the mean) we can expect silver to approach a price of ($80) an ounce (based on the historical 15:1 ratio). Although this analysis tends to remain conservative in its predictions, it’s not at all unrealistic to expect such profits when you consider the cost we now must face in order to mine silver as a primary metal.
The Case For Owning Silver Coins
Remember, never again will gold be rarer than silver. Opportunities like these will come once in a lifetime. I’d suggest you begin to acquire as much silver as your current situation will allow and I recommend a position in circulated silver dollars that are held by you in your physical possession. Circulated silver dollars trade without any dealer reporting requirements, so they can be bought and sold privately. They are easily recognizable by just about every American, and they offer a good amount of silver in an affordable, liquid, and portable form.
The industry will continue to use and need silver in ever-increasing amounts and with this current economic situation and the printing of money out of thin air, silver has only one way to go and that is up.
Should You Invest in Silver Bullion
As with anything in the market, investing in silver bullion has both pros and cons, and what’s appealing to one investor may not be a good choice for another.
Silver just came off a more prosperous year than it has seen in a while, and as the silver prices rise, many investors interested in the silver market are wondering if now is the right time to buy physical silver and make it part of their investment portfolio.
While silver can be volatile, the precious metal is also seen as a safety net, similar to its sister metal gold - as safe-haven assets, they can protect investors in times of uncertainty. With tensions running high, they could be a good choice for those looking to preserve their wealth in this difficult time. With those factors in mind, let’s look at the pros and cons of buying physical bullion in the form of silver.
Silver Can Offer Protection
As mentioned, investors often flock to precious metals during times of turmoil. When political and economic uncertainty is rife, legal tender generally takes a backseat to assets like gold and silver. While both gold and silver bullion can be appealing to investors, the white metal tends to get overlooked in favor of individuals investing in gold, even though it plays the same role.
It’s Tangible Money
While cash, mining companies, bonds, and other financial products are accepted forms of wealth, they are essentially still digital promissory notes. For that reason, they are all vulnerable to depreciation due to actions like printing money. Silver bullion, on the other hand, is a finite tangible asset. That means that it is vulnerable to market fluctuations like other commodities, physical silver isn’t likely to completely crash because of its inherent and real value. Market participants can buy bullion in different forms, such as a silver coin or silver jewelry, or they could buy silver bullion bars.