Peak Silver?

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peak silver

The idea of peak everything has made a comeback over the last ten years, and it may not be a coincidence that this discussion has paralleled the rising prices of many commodities since 2000. However, thinking about resource scarcity is nothing new. Many alive in the 1970s will remember the book Limits to Growth, which is still debated decades after its initial publication. Whether or not you agree with all aspects of that book’s arguments, you would have to concede that ever-increasing growth rates eventually lead to exponential (and therefore unsustainable) demand. Also, to say that something has “peaked” does not mean that we are going to run out of a certain resource. In many cases it simply means that the growth rate in resource production cannot keep up with population or economic growth.

In terms of precious metals, there has been significant discussion of peak gold, at least judging from the frequency of the term on google (for what this is worth). The term “peak gold” registers a far higher count than “peak silver,” and for good reason. Gold production- at least over the last decade- has failed to post the same 2-4% growth rates which occurred in the late 20th century. Silver mine production, on the other hand, has continued to grow at roughly the same rate (2-4%) as it did in the mid to late 20th centuries. So, at the most literal level, we will have to wait for peak silver. And it is not entirely clear that peak gold is a permanent phenomenon either, at least from a historical perspective. I say this because gold production has gone through periods of stagnation in the past, most recently from the 1930s through the 1950s. At that time, gold production stalled out around the 1000-1400 ton per year area, before resuming an upward move in the late 1950s. (This is according to USGS Gold Statistics).

So even though we can't say if gold has peaked, we may be at peak production for quite some time- perhaps a very long time. For example, in the case of silver, estimates are that for most of seventeenth and eighteenth centuries, silver production stagnated, and at many points actually declined (Green, The Millenium in Silver, p.25). Yes, eventually, silver production turned up again, but only after several generations of Europeans had to live with no growth in silver mining. Those people, during the course of their lives, experienced peak silver.

There are several reasons to be concerned about the possibility of some sort of peak or decline in silver production in the future. Here are just a few of the areas of concern, whether or not these factors will turn out to produce “peak” silver.

The Energy Return on Investment and Declining Ore Grades

In 2009, Dr. A.M. Diederen produced an excellent presentation, “Metal Minerals Scarcity and the Elements of Hope” for The Oil Drum: Europe in which he explained how at some point it is no longer profitable for any company to expend more energy to extract smaller and smaller amounts of minerals. Additionally, if you believe in peak oil, it will be challenging to gain access to the requisite amount of oil to do everything from hauling rocks to pulverizing them in search of ever-smaller amounts of precious metal. Finally, Dr. Diederen relates how the percentage of certain minerals in rock has declined for many in-demand elements. Similarly, Steve St. Angelo has compiled examples from the US and Australia revealing how silver ores as a percentage of geologic formations have declined by over 80% since the early 1900s. It is getting harder and harder to extract silver from the earth’s crust, and one has to wonder when output reaches some sort of plateau. (See Angelo, Peak Silver and Peak Mining, silverseek.com)

Lack of New Mine Discoveries

According to Diederen, new mine deposit discoveries peaked at some point in the mid-1980s, with average annual discoveries, in his estimation, having declined over 60% since then. Diederen believes that large new discoveries of metals are unlikely. (See Diederen, “Metal Minerals Scarcity”, slide 12) This is a situation similar to oil, where the world has failed to find another Saudi Arabia in terms of reserves. The lack of new mine deposits leads people to question for how much longer silver mine production can increase if we are simply trying to extract more silver from the same locations that have produced silver, in some cases, for nearly 500 years (such as Mexico and Bolivia).

Silver production is held hostage to the prices of copper, zinc, lead and gold

Only about 20 or 30% of silver comes from primary silver production. In fact for many years the world’s largest silver mining company has been BHP Billiton, which mainly mines alumina, other base metals, and oil and gas. In terms of percentages, roughly 25% of silver production comes from copper, and over 35%% from lead and zinc. The rest, roughly 10-15% comes from gold (see both CPM Silver Yearbook and GFMS World Silver Survey). The fact that silver is held hostage to the prices of other metals influenced mine production in 2008. During this global recession, primary silver production rose much faster than silver produced as a byproduct, even as mine supply did increase over 2.5% (CPM Silver Yearbook 2009, 31). At least in theory, if there were a huge surge in silver bullion purchases during a deflationary depression when base metal prices collapsed, it might be difficult to increase silver mine supply to meet demand.

Anemic Silver Reserve Growth Estimates

In the 1960s, the US Geological Survey only believed that there were about 5.5 billion ounces of silver reserves in the world. The price of silver at the time was roughly 1 dollar (1969). Of course, new reserves can be found and they were found, but the price needed to rise for that to happen. Silver reserves have grown: as of 2010, they stand at roughly 18 billion ounces, give or take. But it is important to note where the price of silver has gone since the late 1960s: it is up 30 times, to roughly 30 dollars an ounce, as of this writing. And of course 18 billion ounces of silver is only about 20 years worth of silver mine production. One way to look at this relationship is that it took a 30 fold increase in the price of silver to yield a 3 fold increase in the amount of reserves. Over the last ten years, the reserve amount has only increased roughly 7% on an annualized basis, even as the price of silver has increased nearly 20% per year. So in order to get more reserves so as to increase available silver from the ground, how much higher will silver go, if there is such a huge difference between the rate of increase in the silver price and the resulting increase in the reserve base? (See USGS Silver Surveys—it is worth noting that up until 2005, the reserve data stood at about 12 billion ounces, or roughly double where it had been in 1970, yet the price of silver was about 5 or 6 times from 1970—)

Among major commodities and metals (besides rare earth elements), silver has the least amount of mineable reserves relative to demand. In other words, if all else remained constant, we would run out of silver before other base metals, oil, or, even, gold. Of course, as shown above, the amount of reserves should increase (along with recycling) in the years ahead. But it is going to require a much higher price for this to occur.

Andean Countries: The Saudi Arabias of Silver

USGS reserve data for silver is subjective and relies on numerous sources (and guesses) from around the world. Still, I am amazed by how concentrated the reserve increases are by country (also note that reserves are different from the reserve base, an even more subjective number discontinued recently by the USGS). Between 2005 and 2010, only three countries accounted for nearly 70% of the 240,000 ton increase in global silver reserves. Those three countries were Peru, with an increase of 84,000 tons, Chile, which increased nearly 70,000 tons, and Bolivia, also nearly 18,000 ton increase. Of significance, Mexico- once a leader in silver production- saw zero increases in reserves from 2005 to 2010 (at 37,000 tons), and the United States, also a one-time leader in silver production, has actually seen its reserves decline from 31,000 tons in 1995 to 25,000 tons today. So the growth in silver reserves, at least according to the USGS, is uneven and concentrated. The above information should also remind people how growth in finite resources can be held hostage to events or issues within very specific parts of the world. In the case of Peru- now the world’s leading silver producer- it was not that long ago that the “Shining Path” (a terrorist organization) seriously disrupted silver mining in that country. The same could be said about other developing countries who often resent outside mining interests. These countries could similarly disrupt successful mining projects for political purposes.

So, as you can see, there are several reasons for concern regarding the possibility of peak silver someday. But I think it is also instructive to look back at silver’s past, and to realize how silver is much rarer today than in earlier eras, and also how silver production, while still growing, is nonetheless far less robust than it once was:

Peak growth rate in silver mine production (per 100 year time frame)

Many economic historians believe that the peak growth rate in silver mine production occurred way back in the 1500s, with the Spanish conquests of Mexico and Peru. Mine production leapt up at least 15 times, from 1 to 15 million ounces, or roughly a 12% annual growth rate in mining over the course of that century (Timothy Green,“Millenium in Silver,” p.25). This growth rate was even higher than that between 1860 and 1940, when mine production increased from under 35 million ounces to over 275 million ounces, or about an 8% annual increase in mine production (Green, Millenium in Silver, p.25). Since 1940, increases in mine production have fallen off dramatically, to between 2 and 4% per year. The other amazing point about the New World silver discoveries is that some 500 years later, Mexico, Peru, and Bolivia are almost always among the top two silver producers in the world (which relates back to the reserves point above.)

Peak ratio of annual silver to gold production (in terms of silver’s abundance)

According to monetary historians, the peak in the silver to gold mine ratio did not happen in the 1500s (although it was still high at around 25 to 1), but rather came during silver’s industrial revolution from roughly 1885 to 1930. It reached a peak of nearly 40 to 1 around 1890, and was still as high as 30 to 1 in 1930. (Fischer, Price Revolution, p.171). According to Roy Jastram, there was a massive surplus of silver in the United States for industrial use in the early 1930s- a difference of five times. We have never experienced this kind of silver surplus, or this large of an amount of mined silver to gold since. Currently, the production ratio of silver to gold is around 9 to 1, although this is not as low as the 5 to 1 ratio seen in the 1950s. And I don’t need to tell you that the surplus in silver production is only a fraction of what it was in the 1930s.

Peak ratio of silver to world population

According to data compiled by the CPM Group, there were 3.25 billion ounces of silver above ground when Columbus discovered the New World in the 1490. With a world population of 400 million, there were over 8 ounces of silver for every person on the globe. This amount grew slightly in the 1500s, but so did world population, and when silver production peaked out in 1600, the number of silver ounces per person was still in the 8-10 area. In 1700, there may have been as many as 4 billion ounces of silver above ground in the world. But the world population had grown faster than silver mine supply, by 50% since 1500, to 600 million people. So there were then less than 7 ounces of silver per person on the planet. Today—even including jewelry--there are less than 4 silver ounces per person on planet Earth. If we just focus on coins and bullion, each person in the world can only have about.15 of an ounce of silver.

Peak percentage of primary silver production versus byproduct of other metals

While no one can know for certain, the highest percentage of primary silver production was likely 50%, and probably achieved in the pre-modern era. Silver has always been known as a byproduct of gold and lead, but before the nineteenth century, the technology did not yet exist to extract silver in large amounts from the base metals. So primary silver production formed a much higher percentage of overall silver mine supply many centuries ago than it does today.

Peak amount of silver held at futures exchanges

Another way of thinking about peak silver is to ask about silver supplies at the major futures exchanges. The amount of silver under the control of the three largest futures exchanges, the COMEX, the Chicago Board of Trade, the London Metal Exchange, and the Tokyo Metals Exchange peaked at 350 million ounces in 1992, with the vast majority, nearly 280 million being at the COMEX (CPM Silver Yearbook, p.150-51). Today? The number has declined to below 150 million ounces, as of 2011 (the London Metal Exchange also no longer offers silver futures trading.) Today’s number is lower than 1972, by the way, even though there are many more ounces of paper silver trading than in 1972, not long after silver futures trading was legalized by the US and British governments in 1964 and 1968, respectively.

So, while we may not have achieved peak silver, the white metal is by no means abundant. And I still don’t think that most people appreciate its rarity.

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