KitcoKitco
navigate¬  
Profile Website


Recent Articles ¬
Listing of Articles >>

 
Printer Friendly

Silver
May 13, 2005


Silver bugs believe that, like gold, silver is money. They also believe that the silver price is going to vastly outperform the gold price because of silver’s supply shortage. But silver is not money; it’s a commodity whose price is far more dependent on industrial demand than on anything else. However, because the silver market is so small, it is entirely possible for silver investors to create their own self-fulfilling prophecy. You need to be nimble, and remember to sell, to take advantage of such an increase in the silver price.

Annual mine production of gold is about 80 million ounces while annual mine production of silver is roughly 600 million ounces, yet gold mining revenues are eight times more than revenues from silver mining at current metal prices.

Why is gold expensive and silver less so? Because gold is money and silver is primarily an industrial commodity. Even though silver has, from time to time, been used as money, its chemical and physical properties make it less desirable than gold as a monetary asset. Among other things, silver oxidizes readily, and it is far more abundant than gold.

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.

Because annual fabrication demand exceeds annual mine supply, silver investors believe much higher prices are in store. However, since industrial applications and photography account for roughly two thirds of annual silver consumption, fabrication demand plays a key role in the silver market. The silver price is thus very dependent on changes in annual fabrication demand. As a result, continued economic growth in North America and the rest of the world should help the silver price remain strong and perhaps move up, whereas an economic downturn could be quite detrimental to the silver price.

If we look at gold and silver in US dollars, then the relative strength in the dollar since the early Nineties should have had the same effect on both metals if they were priced as money, and their charts should look the same. But they don’t.

Silver actually performed much better than gold during the Nineties because demand for silver supported its price during the high-tech boom in the latter part of the decade. When the tech boom went bust, silver suffered, and its price barely budged from 2001 to 2003 while the gold price rallied strongly. Since 2003, gold and silver prices have moved more or less in tandem, and that is a result of the weakening US dollar. However, if we see a change in the economic climate, the correlation between the two metals’ prices can easily break down again.

The amount of silver typically used in any given application usually represents a very small component of the overall manufacturing cost. Therefore the demand for silver from both industrial applications and photography is very inelastic, meaning that if silver’s price increases, demand does not decrease.

At the same time, 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, fabrication demand will not decline due to the price increase.

So speculators buying silver in anticipation of a move upwards can easily create a self-fulfilling prophecy, causing the silver price to soar. But when they want to sell their metal to take profits, the same lack of liquidity that drove the price up will drive it right back down again.

This combination of a small illiquid market, inelastic demand and feverishly bullish investors could cause the silver price to outperform the gold price at some point. However, you must be wary of an ensuing collapse and remember to sell. Silver’s day in the sun might be very short-lived.

Still, there is no guarantee that the silver market will enjoy the benefit of such a self-fulfilling prophecy. Judging by the silver price since 1990 in relation to what we know was going on in the world, it is entirely possible that silver will suffer along with other base metals and commodities during an economic downturn.

As a side note, there will not be a commentary next week. I will be in Reno for the Geological Society of Nevada symposium and then in New York to speak at the Institutional Gold Conference (see www.paulvaneeden.com for details). Hope to see you there.

 

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.

Disclaimer

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.


Your Feedback.
You will stay on this page after you press "submit"