Are We Running Out of Silver?

Silver has been on fire for the last three years – substantially outperforming its spotlight-grabbing cousin, gold.

Because we believe this bull run is far from over, we advise investors to always maintain exposure to the precious metals markets. But the question every investor faces in a bull market is: Do I buy now, anticipating prices will continue higher – and chance getting clobbered if a correction arrives? Or do I wait for a pullback and possibly miss out on big gains?

There’s risk either way.

But we suggest using temporary price declines to steadily accumulate the best silver stocks and your preferred form of bullion. Looking back, after this bull market has finally run its course, we think gold and silver will have amply rewarded those who bought smart, had meaningful exposure, and stayed the course.

There are numerous factors that influence the direction of silver prices, but there are two key trends regarding supply and demand that are critical to understand.

The first is industrial use. Demand from a number of industries that use silver has been flat or falling. Household demand for silver like cutlery, flatware, and candlesticks hasn’t risen in ten years. Jewelry fabrication is up but a blip. With the shift to digital photography and image storing, use in photographic film processing continues to fall. And yet, total demand from industrial users keeps climbing.

So what’s driving industrial demand?

Since 1999, consumption in electronics has increased 120%. Silver use in solar panels began in 2000, and usage is up 640% since. Silver was first used in biocides (antibacterial agents) in 2002 and, while still a small percentage of total silver use, it has grown six-fold. Taken together, these three industrial uses of silver are consuming about half of all the silver mined each year!

Furthermore, the Silver Institute forecasts that total industrial use of silver will rise by 36% over the next five years, to 666 million troy ounces/year. That’s a lot of silver, meaning this portion of demand isn’t letting up anytime soon.

To put it another way, ten years ago, jewelry and silverware consumed twice as much silver as electronics applications. Today, electronics applications consume much more silver than jewelry and silverware. The point is not only that the number of industrial uses for silver is growing, but also that the demand within each of those usage categories is rising as well. These increasing sources of demand are now more likely to keep a floor under the silver price in the future.

The second issue is mine supply. Silver mine production has been increasing over the past decade, largely due to rising prices, allowing companies to ramp up production and bring more metal to the market. In fact, global mine production is up 33% since 1999.

But despite miners digging up more and more silver, production alone can’t meet global demand, and the gap has to be filled by scrap silver coming to market.

But there’s a catch with scrap. Traditional sources of old silver scrap are depleting. Meanwhile, the new industrial sources of future silver scrap do not lend themselves to recycling as easily as, say, silverware. While scrap metal comprises about 20% of silver’s total supply, many of these new applications are difficult to reclaim. Some applications contain such small amounts that they’re uneconomic to recapture, such as many biocidal and nanotechnology applications. With others it’ll be a long wait. Solar panels, for example, have a 20- to 30-year life. Still others are waiting for more effective recovery programs; more than half of all silver in cell phones, TVs, computers and other electronics, for instance, still ends up in landfills.

In other words, a growing portion of the silver that’s consumed today won’t be returning to the market anytime soon. And that may be one very good reason why the bull market in silver won’t be ending anytime soon.