Waiting for the Silver Lining

June 24, 2013 at 07:38

truthing

Silver is often referred to as the ‘poor man’s gold’ and is frequently included in discussions about gold. But while gold is generally traded as a hedge against inflation, silver is both an investment vehicle and a metal with many industrial uses. Recently, both precious metals have taken declined significantly, particularly in response to the strengthening US equity markets and the US dollar.

What are the repercussions of the drop in price of silver? What is the future for silver?

Many mining companies give a ‘cash cost’, however this measure is not a standard accounting (GAAP) formula. It is often simply the operating cost divided by the amount, in ounces, of gold and/or silver produced.

Mines need to explore in order to continue to operate – and this is one of the key costs that is not included.

It is not easy to get a clear cost of producing an ounce of gold or silver. The ‘cash cost’ does not accurately reflect the true cost of extraction as it does not include such costs as exploration, tax and administration.

There are plenty of discussions and research available for the diligent investor who wishes to become informed of the true costs of producing of gold and silver.

As prices decline, will industrial users become anxious and buy up large amounts?

The legendary investor Warren Buffet said that investing in gold is a waste as it is essentially a useless metal. However, Mr Buffet has made significant investments in silver in the past. He purchased between 90 and 130 million ounces around 1998.

Gold’s greatest attribute is also its biggest problem, at least as far as its price is concerned. The fact that gold is the purest form of money means that there is a large above-ground stock of the metal which continues to grow by a small amount each year.

The most attractive aspect of gold is also its biggest problem. Gold can be considered the ultimate form of money, and thus above-ground stockpiles of gold increase in quantity, though in small amounts, each year. Silver, on the other hand, is used in industrial processes and products – and in many cases the silver cannot be recycled.

The typical reader of this article will use silver several times a day: in mobile phones for example. Silver is also found in bathroom mirrors, wrist watches, computers, dishwashers, water purifiers, refrigerators and even in your clothing.

Batteries need silver. And batteries are required for mobile phones, laptops, hearing aids, calculators and electric cars. Some lesser-known but important uses of silver are in ethylene oxide and formaldehyde — both of which are used in the manufacturing of polyester clothing and various plastics.

Many former high demand areas for silver have shown continued decline, such as CDs and DVDs, and in particular photography, which in 2003 used 192.9 tonnes of silver. The amount of photographic usage has declined every year, and 2012 saw only 57.8 tonnes, as users move to use digital technology such as cell phones.

The tablet computer market in the Middle East and Africa (MEA) region grew by 184 percent year-on-year in the first quarter of 2013 to reach a total of 2.25 million units, according to the latest results released by International Data Corporation (IDC).

IDC also predicts that the global smart connected device market will continue to surge — with shipments forecast to surpass 2.2 billion units and revenues reaching USD 814.3 billion in 2017. By 2017, 83 percent of the market is projected to be composed of smart phones and tablets, up from 70.8 percent in 2012.

Similar growth is predicted for the mobile market. Mobile Factbook 2013 estimates there will be seven billion mobile subscribers by the end of 2013, 7.5 billion by the end of 2014, and 8.5 billion by the end of 2016.

This bodes well for silver.

Buffet has again returned to silver, and for the third time in just over a year, it is in the form of solar energy. MidAmerican Energy Holdings, a subsidiary of Berkshire Hathaway investment company, will pay between two billion USD and 2.5 billion USD on two solar energy projects in the Antelope Valley, California.

Silver used for industrial production is expected to rise to a record 511 million ounces by 2014 following two consecutive years of decline, according to Thomson Reuters GFMS, which produced the report for the Silver Institute.

World Silver Supply and Demand:

(in millions of ounces)

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Supply

Mine Production

597.2

613.6

637.2

641.3

666.1

683

713.6

752.7

757

787

Net Government Sales

88.7

61.9

65.9

78.5

42.5

30.5

15.6

44.2

12

7.4

Old Silver Scrap

196

198.7

202.7

206.2

203

200.8

199.8

228.8

258.1

253.9

Producer Hedging

45.9

50.4

12.2

Implied Net Disinvestment

7.8

1.4

Total Supply

889.8

874.1

951.7

926

913

914.3

929.1

1076.2

1039.4

1048.3

Demand

Fabrication

Industrial Applications

368.4

389.7

430.3

453

486.2

490.9

403.6

500.7

487.8

465.9

Photography

192.9

178.8

160.3

142.2

117.6

101.3

79.3

72.1

66.1

57.8

Jewelry

186.8

187.6

188.4

176.5

183.8

179.1

178.7

192.8

186.5

185.6

Silverware

85.1

68.3

69.6

63.4

61.5

59.8

55

52.8

48.3

44.9

Coins & Medals

35.7

42.4

40

39.8

39.7

65.3

78.8

99.4

118.3

92.7

Total Fabrication

868.8

866.7

888.6

874.9

888.9

896.4

795.4

917.9

907.1

846.8

1693.7

Producer De-Hedging

21

2

11.6

24.1

8.7

17.4

41.5

Implied Net Investment

5.4

63.1

39.5

9.3

116.3

158.3

132.3

160

Total Demand

889.8

874.1

951.7

926

913

914.3

929.1

1076.2

1039.4

1048.3

Silver Price

(London US$/oz)

4.879

6.658

7.312

11.549

13.384

14.989

14.674

20.193

35.119

31.15

SOURCE: World Silver Survey 2013

With numerous industrial uses, many of which show strong growth potential, could we see a similar event tothe  panic buying of palladium in 2000, when the Ford Motor Company, concerned at the lack of supply purchased large amounts and rapidly sky rocketed the price?

If such panic buying from industrial users does not occur, the future for silver does look promising, and the current price retreat, viewed in relation to the cost of production, could be a catalyst for strengthening silver.