Silver: Can You Say Deficit?

Many, like gold, consider silver a barbarous relic when the masses flee to this poor man’s gold in the eye of inflation. This group acts as if it has a stigma attached to it, but in reality it is considered one of the best inflation hedges. In fact, it has historically outperformed gold during high inflationary periods. We are undoubtedly facing a great deal of inflation in the years ahead, which should cause the masses to begin accumulating the metals for capital preservation purposes. But what if we took out the monetary role silver has played for thousands of years? Well to determine that we obviously must revert back to econ 101 and the laws of supply and demand.

Most people are not very well schooled on the role silver plays in their everyday lives and consider it applicable mostly to industrial uses. Once upon a time this was true of the metal but with technological innovations sprouting up left and right in today’s world, we have found an inordinate amount of current and potential uses for this metal. World consumption has never been higher and for good reason. The following is a brief list of some important roles and characteristics of silver:

• Jewelry
• Electronic devices
• Water filtration – kills legionnaires disease
• Silver Oxide Batteries – 40% longer life than Lithium ion batteries, which can be recycled
• Piping
• Solar Panels
• Lenses – A new line of lenses that can be worn in doors due to the way It conducts light
• Photography
• Disinfectants
• Posses germicidal characteristics unlike lead or mercury which are harmful
• Best Conductor of Electricity
• Inhibits Growth of Bacteria and Fungi and often added to clothing
• Posses Catalytic properties – Ideal for use as a catalyst in oxidation reactions
• Only catalyst available today that can convert ethylene to ethylene oxide (import for industrial purposes)
• Used to make control rods that regulate fission chain reactions in pressurized water nuclear reactors
• Mirrors
• Dentistry – used to make amalgams (widely used for dental fillings)
• Silverware
• Coinage

Now that we have gone through a brief overview of the important role silver plays, let’s focus on the supply and demand characteristics. This is where it starts to get very interesting as we have been running a deficit going on decades now. We are setting records for world silver production but this is being negated be record silver consumption. We will look at the 5 year period ended 2004 (as that is far as the 2010 CRB yearbook estimates consumption) and see the massive deficits accumulating in this market.

Source: U.S Geological Survey (USGS)¹

This deficit amounts to over 1.4B ounces over just a five year period, which is very bullish to say the least. Although we don’t have current world consumption numbers, we do have current world mine production (at least up until 2009). Record mine production in 2009 of 688m Troy ounces still puts us at a deficit, holding consumption constant by more than 175m ounces annually. In reality, however, silver consumption has picked up since 2004, making this deficit just a base case scenario. As more and more uses are found for this metal consumption will continue to rise, perhaps at an accelerating rate. Mining production however can’t continue to accelerate unless there is an incentive to do so, which of course is higher prices. The bottom line is silver is not close to its equilibrium price as far as supply and demand go even with taking out the monetary component. Total bullion inventories are approximately 1B² ounces, so how much longer will it take for the price to reach equilibrium before we run out? Not very long if history is any guide.

Resources:

¹ U.S Geological Survey (USGS)

² U.S Geological Survey (USGS) & The Silver Institute