The Silver Megathrust

From Silver Seek / By Stephan Bogner / April 27, 2012
History does not repeat itself, but it sure does rhyme.“ (Mark Twain)
Between 1970 and 1979, the silver price was increasing steadily from $1.50 to $6, before taking off in September 1979 from $10 to $50 within 5 months. During that bull cycle, demand for silver did not increase but actually declined (sharply in 1979). It was as late as 1983 when demand increased confidently from 12,000 to 27,000 tons per year until 2000 – yet the silver price was in a 20 year bear market during that time. In 2003, when silver started its new bull market, the demand actually dropped to 23,000 tons until 2005 – during which 2 years silver almost doubled from $4.50 to $8. Since 2005, demand is rising stronger than ever, having reached 33,000 tons in 2010, whereas the silver price is rising strongly as well.
The initial comparisons indicate one important phenomenon in the silver market, namely that (industrial) silver demand is “price inelastic”: that is, changes in price have a relatively small effect on the quantity demanded. The demand for other commodities is known to be “price elastic”: that is, changes in price have a relatively large effect on the quantity demanded (if tomato prices blow up, go bananas). This basically translates into: no matter if the silver price crashes or explodes, demand – unimpressed – will keep its own dynamic pace, because demand does not respond to price changes. Firstly, silver is the most broadly used metal, because of its unique characteristics, such as highest thermal and electrical conductivity of all metals. In most of its few thousand application fields, silver is considered a non-substitutable product. In contrast for example, when the platinum price increases too strongly, automotive demand traditionally substitutes for cheaper palladium thus potentially driving down the platinum price. Secondly, silver typically makes up only a relatively small component in the total of the product and the total of its costs. Both these demand characteristics/inelasticities (not substitutable and small cost component) are crucial to understand the silver price, because they remind that no matter if price explodes or crashes, (industrial) demand virtually does not care, but keeps on consuming as per its own factors/fundamentals. Notwithstanding, an increased demand principally has a positive effect on the price, of course (GFMS expects fabrication demand in 2012 to rise by approx. 3-5% to around 29,000 tons silver, whereas fabrication demand accounts for more than 80% of total demand; fabrication demand includes industrial applications, photography, jewelry, coins and silverware).
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