August 20, 2004
I’ve had so many questions about silver that
I figured I ought to get around to saying something about it.
Unlike gold, silver is not predominantly a monetary
metal. By that I’m not trying to imply that gold is used exclusively
for money, rather that its price is determined by its value as a
monetary asset. If gold was not valued as money, its current price
would be but a small fraction of what it currently is… much
While silver has from time to time been used as money,
its chemical and physical properties make it far less desirable
than gold. Among other things, silver oxidizes very easily, and
it is also more abundant, even though you might not think so given
how tough it is to find a good silver stock to buy. But more about
silver stocks in a minute.
Annual mine production of gold is about eighty million
ounces while annual mine production of silver is roughly six hundred
million ounces. Silver production is more than seven times the annual
gold production. Yet, in dollar terms, the gold market is more than
seven times as large as the silver market.
Why is gold expensive and silver less so? Because
gold is money and silver is primarily an industrial commodity.
Annual fabrication demand for silver is well in excess
of eight hundred million ounces a year, of which roughly forty percent
is used for industrial applications, just over twenty percent for
photography, thirty percent for jewelry, and the rest (less than
five percent) for coins and medals.
As you can see, industrial applications and photography
account for about two thirds of annual silver consumption, and the
rest is used mainly for jewelry. Fabrication demand therefore plays
a key role in the silver market.
If we look at both gold and silver in US dollars,
then whatever effect the dollar had on gold, it would have had a
similar effect on silver. If both were priced as money, the charts
would look the same. But they don’t.
Silver actually performed much better than gold during
the Nineties, rising more than twenty percent from early in the
decade and trading fairly consistently around $5.50 an ounce from
1994 to 1999. Gold, on the other hand, increased by only seven percent
from 1992 to 1994 and stayed in that range only until 1996. From
1996 to 2001 the gold price declined by more than thirty percent
while the silver price held up until 1999 and then declined only
slightly more than twenty percent until 2001.
Industrial demand for silver supported its price during
the latter part of the Nineties, which is why silver outperformed
Industrial demand for silver increased by more than
thirty percent from 1994 to 2000, and has declined by more than
six percent since then. So while the “tech boom” was
in full force, silver got the benefit. When the tech boom went bust,
silver suffered as well. And that is why the silver price barely
budged from 2001 to 2003, while the gold price rallied strongly.
But the amount of silver typically used in any given
application usually represents a very small component of the overall
manufacturing cost. The demand for silver from both industrial applications
and photography is therefore very inelastic, meaning if the price
increases the demand does not decrease.
It is this inelastic demand for silver that could
propel its price much higher if investment demand for the metal
picks up. And that is precisely what has been happening since late
Because the silver market is such a small market,
in dollar terms, a relatively small amount of investment demand
can cause the price to spike dramatically. And because fabrication
demand is inelastic, it doesn’t decline either.
So when speculators start buying silver in anticipation
of a move upwards, it very easily become a self-fulfilling prophesy,
and the silver price soars. But when they want to sell their metal
to take profits, the same illiquidity that drove the price up will
drive it right back down again.
The bottom line is that I fully expect silver to outperform
gold as the bull market unfolds but at some point, I also expect
the silver price to collapse again, at which point it could vastly
The biggest problem for silver speculators is the
lack of quality silver companies to chose from. Silver is primarily
a by-product of lead-zinc mines, with secondary production from
some copper-gold, and gold-silver mines. There are very few primary
silver mines in the world -- at least not many large ones.
Silver often accounts for a minor amount of the revenue
generated by large lead-zinc, and copper-gold mines. So even if
the silver price does increase, it has only a small impact on the
value of the mines. So unless you specifically want to be in the
lead and/or zinc businesses, you’re probably better off buying
Fortunately, because of the volatile nature of the
silver price itself, one could stand to make a handsome profit just
buying the metal, although storage might become a problem.
But if you buy physical silver at least you don’t
have to worry about geo-political risk, management risk, geological
risk, or any of the other “risks” that far too often
“happen” to mining and exploration companies.
Even though the silver price was less volatile than
the gold price during the Nineties it will become much more volatile
in the future as speculators drive the price upwards. So if you
like volatility, silver’s for you.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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