The hype, confusion, and debate regarding reports of silver shortages are unfortunate, as they distract from discussion of the fundamentals behind the rising silver price. Fundamentals such as: peak silver, the near depletion of government stockpiles, the future increases in industrial silver demand, manipulation in the paper silver markets likely worse than any other asset class, and the misunderstanding of silver’s monetary history among gold-only investors. Admittedly, fundamentals do not always drive prices. The irrational human herd can be completely unconcerned with fundamentals at times. Still, fundamentals can be used to inspire and make others think about the relative value of overlooked financial assets. And silver, at probably less than .5% of global assets, would certainly count as overlooked.
The Silver price can fire on more than one engine
Compared to the first industrial revolution for silver between 1900 and 1970—where demand for the white metal exploded from under 100 million ounces to over 400 million ounces—over the last 35 years industrial demand for silver (including photography) has not increased much. Industrial demand has been volatile, but it has consistently been between roughly 350 to 550 million ounces give or take, since the mid 1970s, even if there has been a slow move to the high end of the range in the last 15 years. This may come as a surprise to some, but silver has yet to have another “industrial revolution” of the same size and magnitude as the one for silver between roughly 1900 and 1970. Maybe industrial silver demand will never increase by 4 times the way it did in the early and mid-20th century, but remember that silver mine supply also increased several hundred percent over that same time period. And no one believes that the type of increase once seen in mine supply is possible if silver's industrial demand begins to increase.
It also bears repeating that the entire time of the Hunt Brother’s Silver Corner, from 1973 to 1980, industrial demand for silver was declining (if only slightly), meaning that silver was rocketing higher by several hundred percent solely from investment demand (see Handy and Harman “Annual Reviews” to get a sense of the historical supply and demand of silver). The investment demand story has propelled the price of silver higher over the course of the last decade as well: investment and coin demand has exploded by more than 300%. This category has been the only reason I can see that silver prices have moved higher in the recent past, but there are other future reasons for silver’s increase as we move into the 2010s.
Silver’s Next Industrial Revolution
A number of silver experts, foremost among them David Morgan, but also Stephen Leeb, Ted Butler and Izzy Friedman, have all been discussing the possibility of industrial demand finally breaking out of the 400-600 million range, and begin to move up closer to the 600 to 900 million range in the future, and some would extrapolate an even higher number for industrial demand in the years ahead. Of course this is all a guess, but silver is a highly versatile and in-demand metal for computers, cell phones, and many forms of alternative energy for green living.
Yes, much of the silver in PCs and other electronics is recycled, so an increase in demand may also be accompanied with an increase in the ability of silver to be recovered. But as David Morgan has pointed out, the likely dramatic increase in solar energy (some put it at 20 fold over the next decade), plus the need for water purification systems, sanitized hospital or medical devices, and RFID tags all represent an increase in consumable, non-recycled silver—possibly 200 million ounces a year or more. Given the estimates of the USGS that there are only 17 or 18 billion ounces of silver in the ground, even if mine production stayed the same, there is less than 20 years of extractable silver left. So where will all of this silver come from to meet surging industrial demand? Well, the CPM Group estimates above ground stockpiles of jewelry and silverware at over 20 billion—so maybe more of this type of silver will be scraped, even though it is held in many, many small hands around the globe. On an annual basis, perhaps jewelry and silver consumption will decline by another 100 million ounces, thus freeing up more silver for industrial use? Perhaps recycling will increase from roughly 170 million ounces a year to something higher (but could it realistically double or triple??)
But perhaps more likely, those who want to invest in silver coins and bullion—the same people who have driven investment/coin demand from less than 50 million ounces to over 220 million in a decade—will find that there are limits to the possible when it comes to getting access to the “other” monetary metal. New investors will be told to buy their silver from people who already have it, and not expect any more new silver supply to be “wasted” on coins, ingots, or bars.
When the silver rocket takes off, good luck picking pullbacks
Which brings me to the title of this piece: “Silver’s Palladium Moment.” Part of the reason for the allure of half-truths about 100 ounce bars being unavailable, or other gossip about shortages being taken seriously, is because many people in the precious metals industry understand just how tiny the silver market is for investment, as well as the other possible factors that can drive the silver price higher, which have yet to materialize. Remember the dollar amount of available silver for sale is in the single billions of dollars & 30 billion dollars is the likely value of all the silver coins and bars on planet Earth. Contrast this to the TRILLIONS of dollars in stocks, bonds, and real estate and you get a sense for silver’s rarity. These industry insiders also remember what happened to palladium between 1997 and 2000. In late 2000, Ford Motor Company panicked and bought large amounts of palladium in response to shortages and disruptions coming out of Russia, one of the world’s largest Palladium producers. The price of palladium skyrocketed to near $1100 an ounce, nearly a 10 fold increase in less than 10 years. I think the PGMs are also a great investment. But unlike the platinum group metals, silver possesses a much larger concentrated short position on the COMEX, there are many more investors who only own silver as a derivative or a futures contract or on a fractional reserve basis, and—at least according to the USGS—the platinum group metals are only about 6 times more rare than silver in the earth’s crust, and not over 40 times as expressed in the price. Additionally, silver has yet to experience the industrial revolution described above. I do realize that platinum and palladium are nearly a hundred times rarer above ground and that the PGM’s in the ground can be very uneconomical to extract, but silver is the cheapest precious metal, and therefore the easiest one to acquire for poorer investors looking for a way into monetary assets separate from the banking system.
Yes, all assets are manipulated to varying degrees, and all assets have their own set of possibly bullish fundamentals to go with them, but I am at a loss to think of another asset with a longer laundry list of reasons to go higher than silver.
