Is Silver's Salvation Upon Us?
November 13, 2009
ADVANCES in technology, increasing focus on reducing human interaction with bacteria, and tracking goods and people are all good news for silver and the price of the industrial metal, which has lagged for so long, says Jessica Cross, CEO of VM Group.
Long regarded as the poor cousin of gold, the metal, which is mainly used in industrial applications as well as to make jewelry, has bright prospects, with off take in a spectrum of new products put at just below 350 million ounces by 2020 (see graph below), Cross argued in a presentation at the LBMA Conference earlier this month.
The silver price is currently trading around $17.30/oz, (TP Note: at today's pricing 11/23/09, make that $18.60 ) a level that it traded around in the first half of 2008 when it broke up to just shy of $21.
These two spikes were unparalleled, certainly since 1985, with the metal touching slightly north of $8.50 just once since then.
Looking at the history of the silver market, Cross said about two thirds of the mined metal is a by-product of other minerals like copper, gold and lead, making it difficult to determine a price at which silver production would fall in a natural supply and demand scenario. Being a by-product, the metal will come onto the market almost regardless what the price is for it.
One of the major users of silver, the photographic film sector, is being particularly hard hit as consumers turn to digital cameras. A graph of silver demand by the sector shows a steady decline since a peak above 200 million ounces in the early 1990s to well below 150 million ounces in 2009.
Another anchor on silver prices, which tend to take direction from the waxing and waning gold price, is that a lot of silver used in a range of applications - like photographic film, electronics and batteries -- tends to be recycled, bringing back about 400 million ounces a year of the metal to the market.
This metal appears to be in the right place at the right time…
But the days of huge recycling could be drawing to an end, Cross said, pointing to a host of technological advances needing silver, including wound care, food hygiene and water, wood preservatives, textiles, solar panels and radio frequency identification tags.
"These new end uses for silver are set to pick up the demand slack left by the shrinking photographic industry," she said. "But, unlike photographic film, these end users do not generate vast amounts of recycled metal. In general... the metal is going to be taken off the market for good." Silver's time has come, she said.
"The change is coming about as a result of silver's unique properties as a biocide as well as is superior conductivity," she said.
"The interesting thing is that many of the world's worries and woes today are playing right into the hands of silver and this metal appears to be in the right place at the right time in a number of applications."
Radio frequency identification tags, used in identity documents, passports and stock controls, are growing in use. China, for example is spending $6B to install these devices in identity documents for all its citizens and in transport tickets, she said.
London-based metals consultancy VM Group estimates use of these tags will grow to more than 30 billion by 2020 from around seven billion now. Each tag contains about 10 milligrams of silver on average, absorbing nine million ounces of silver from the 2.3 million ounces currently.
Solar panels and mirrors could absorb another 50 million ounces by 2020 compared to 18 million ounces now. Wood preservative coatings could account for up to 100 million ounces a year as chromate copper arsenic, the existing wood preservative is phased out.
There were no estimates of the amount of silver that could be used in plasters and bandages, which use silver for its anti-bacterial properties. These properties also feed into the clothing and textile sector where body odors and bacteria are eliminated.
Silver is also used in water purification devices and to store food. It could take up around 95 million oz by 2020.
"Superimpose this good news on the tonnages of silver that have gone into the ETFs (silver-backed exchange-traded funds) and you have an underlying strength within this market to justify its current price strength," Cross said.
The gold:silver ratio is expected to narrow. At current prices you can buy 64.4 ounces of silver for the price of a single ounce of gold.
"The current market conditions indicate that gold has become overpriced and silver has become underpriced, suggesting there will be a shift in assets from gold to silver," said Jeffrey Lewis, who edits Silver-coin-investor.com.
"Since 1970, the ratio of the number of ounces of silver you could buy with one ounce of gold has run as high as 80:1 and as low as 20:1, with a mean of 54:1. Today's ratio is moderately higher than 54:1; in fact, the ratio is nearing 64:1, suggesting that there will be a correction in either the price of gold, or silver will advance to make up the deficit," he said.