A K Agnihotri: The lure and allure of silver (part ii)

(This article is the second and concluding part of the one published in the November 2011 issue.)

Silver had and continues to be used in many ways. Varkh is a foil of very pure silver made by pounding it into sheets a few micrometres thick. It is backed with paper for support which is peeled away before use. Varkh is used for garnishing sweets and other culinary decorative uses. India converts nearly 13 tonnes of pure silver into edible silver foil each year.

Silver is also used in ceremonial and religious practices. It forms part of architectural elements as also in handicrafts, paintings, furniture, vigrahas (statues) and vahanas (chariots), coinage, cosmetics and antiques. Silver zari (thread) forms part of India’s textile heritage. Silverware such as cutlery, table flatware, bowls, candlesticks, armour, weapons and other objects are still being manufactured for Indian and foreign markets

Based upon its unique properties it is used in thousands of applications and all the promising new technologies also employ silver. Solar, new electronics, battery and laser technologies, water purification, the list is endless. As demand and population and the quest for improving standards of living grow in future, that demand will bump up against limited supplies with a big impact on price.

Demand and Supply in 2010

Demand

Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Million ounces in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 million ounces, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011. Jewellery posted a Continued from page 1

gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world’s improving economic picture. Photography use fell by 6.6 million ounces. With the increased use of digital cameras, the demand in this sector will witness a further slow down. Silverware demand fell to 50.3 million ounces in 2010 from 58.2 million ounces in 2009, essentially due to lower demand in India.

WORLD?SILVER?DEMAND

Supply

Silver mine production rose by 2.5 percent to 735.9 million ounces in 2010 aided by new mines in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year. Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.

Like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity. Silver often tracks the gold price due to store of value demands, although the ratio can vary. In 1792, the gold/silver ratio was fixed by law in the United States at 1:15, which meant that one troy ounce of gold would buy 15 troy ounces of silver; a ratio of 1:15.5 was enacted in France in 1803.

The average gold/silver ratio during the 20th century, however, was 1:47. The lower the ratio/number, the more expensive silver is compared to gold. Conversely the higher the ratio/number, the cheaper silver is compared to gold.

THE FUTURE--:

Where do we go from here? Conventional wisdom would suggest that when everyone is bullish, that is the time to sell. However, with mining contributing to only 1/3 rd of the demand and demand for silver increasing rapidly silver is going to make new records not only in 2011 but also in the next 3 years. New demand for silver consumption is increasing in:

• New industrial applications using silver are expected to account for an additional 40 million ounces of demand by 2015.

• Silver’s unique chemical properties are constantly leading to new industrial demand, one example being the development of products using silver as an antibacterial agent.

But with the increase of the demand of silver, procurement of silver from mines is virtually flat: Silver production increased by a very modest 2.5% during 2010 to 753.9 million ounces. The biggest mining is carried out in Mexico, followed by Peru, China, Australia and Chile.

China is now on a buying spree of Silver along with Gold. Earlier China was accumulating gold and now silver has found the new address of accumulation in China. China desires to replace dollar as the safe currency and convert the savings into Gold and Silver. If China desires to replace dollar as a currency for reserves then China will have to accumulate gold to the tune of two times what US gold reserve has within the next two years. China has 1054 tonnes of Gold compared to US which has 8133 tonnes of gold. So one can imagine how aggressive China will become in coming days for buying Gold.

Paper currency is no longer a value growth based asset. The rising defaults (bailouts of every economy) and rising crude import bill of every economy in the coming next 10 years will force all the nations to convert their savings into Gold and Silver.

The Price of Silver: Six Centuries of History

n 1344 - Price of silver @ ~$400.00 per ounce

n 1477 - Silver value reaches ~$806.00 per ounce ( all time high )

n 1545 - Potosl mines open in North America ( silver value begins a gradual decline )

n 1780's - Silver value falls below $100.00 per ounce

n 1890's - Silver prices fall below $50.00 per ounce

n 1980 - Price of silver @ $68.00 per ounce (Hunt Brothers attempt to corner silver market)

n 1998 - Silver valued @ $6.24 per ounce

n 2003 - $4.07 per ounce

n 2010-  $20 per ounce

n 2011- $40 per ounce (Avg.)

 

 

The Future of Silver?

.Silver fundamentals made inevitable the rise so steep,

To obtain more silver, we look to the ocean deep!

The price of silver continues to escalate,

Worldwide consuming industries pay the freight!

Silver shareholders are human moneybags,

What scares them now, not high price tags!

Leveraging thousands of dollars into millions,

Gates, Soros and Buffett make billions!

- Charles Savoie © 2002