Silver is a popular and practical commodity to hold and store wealth as silver has had a long historical commercial use for money for thousands of years. Silver’s role in the global monetary system was displaced in the 1870’s and within the United States monetary system by 1965. Today, silver is in partial use in the form of coinage for several national currencies around the world although it is now used primarily as an industrial commodity. Conversely, gold bullion is exclusively used as money for the most part.
Uses for Silver
There is a wide array of commercial uses for silver since this commodity is the best conductor of electricity, an efficient heat conductor and holds antistatic properties. A new growing market for silver is in the area of medical applications including antibacterial textiles. Silver has long been in demand for money in the form of coinage. Other well known uses include both jewelry and in photography. Other industrial applications include electronics, telecommunications, water purification, solar energy, mirrors & coatings and batteries to name just a few. Unlike gold, one negative deficiency for silver is that it oxidizes easily.
Supply / Demand Relationship for Silver
Approximate figures have annual supply for silver at 650 million ounces from mine production , another 150 million ounces from silver scrap recycling. At present, central bank holdings of silver are just about nil with only an estimated 150 million ounces in holdings. Exchanges such as COMEX hold a further estimate of 150 million ounces of silver. Annual silver demand is in the range of 900 million ounces resulting in an annual deficit ranging from 100 to 200 million ounces. This shortfall over the last decade has been made up by above ground inventories that are now becoming quite depleted. The silver bear market since 1981 has recently ended in 2003 with the upturn in silver prices. Perhaps, it is this silver shortfall that caught the eye of world investors such as Warren Buffet who announced that he purchased 130 million ounces in 1997-98. Silver demand consists of 30 percent from jewelry, 40 percent from industrial fabrication, 25 percent from photography and 5 percent from coinage.
KNOWLEDGE: Photography Demand for Silver
Photography demand for silver represents approximately 22 to 25 percent of total silver demand. A prevailing issue is the inception of new technologies such as digital photography that may significantly reduce silver demand. In BI.C’s view, silver demand from photography will cease to exist in the very long term such as 35 to 50 years. But until then, much of the third world cannot afford digital cameras or the computers to download the pictures. Until then, traditional camera photography will remain maintaining a strong demand for silver for the foreseeable future. It has been reported that silver demand from photography is actually growing modestly with total photography silver demand in the area of 200 million ounces a year. Demand from first world countries for photography from silver use is expected to decline modestly as the demand for digital cameras becomes more popular.
CURRENCY: ISO Symbol ‘XAG’, silver ounces. At time of review on September 10, 2004, silver had an exchange valuation of 6.13 US-dollar ‘USD’ for 1 XAG. Silver is a common commodity in demand in manufacturing and in other commercial product areas such as the development of photography. Silver is a smart commodity/currency to diversify into considering that there currently is an annual world silver deficit with demand greater than supply over the last decade with corresponding declining inventory levels. Silver production is largely a by-product of lead-zinc mines, copper-gold and gold-silver mines. Pure silver mines only represent about 25 percent of production as most silver supply is from this by-production in mining.
CURRENCY HISTORY: the modern day peak for silver came in 1980 at 52.50 USD to 1 XAG (one silver troy ounce) just at the same time when gold bullion hit its USD high valuation. Historical quotes for silver include: recent peak on April 2, 2004 at 8.29 USD to 1 XAG, May 7, 2002 at 4.61 USD, November 22, 2001 at 4.07 USD, year 1992 low at 3.94 USD, 1987 peak at 11 USD, January 1980 at 52.50 when the Hunt brothers cornered the silver market, August 1979 at 9 USD, early 1978 at 5 USD, mid 1970’s up to year 1978 mostly in the 4 to 5 USD range, prior to 1972 the silver price was flat for close to 200 years floating under 1.50 USD for 1 XAG.
During the Great Depression in the 1930’s, the price of silver bottomed at 25 US cents/ounce in 1933 rebounding to a year-end 1933 price of 44 US cents. From 1934 with the introduction of The Silver Purchase Act, the U.S. government set the official price of silver at 1.29 USD/ounce. Over the next 4 years, the U.S. treasury alone accumulated over 3 billion ounces of silver reaching a peak of 6 billion ounces in the 1940’s of which was liquidated during the 1960’s during a failed attempt to hold the silver price at 1.29 USD/ounce. The price of silver remained at 1.29 USD/ounce until the Coinage Act of 1965 in the United States that allowed for the elimination of silver component from coinage, this was end of silver mostly for the medium of exchange within the U.S. monetary system. During this time, silver coinage in the United States was worth more that the face value of the coins as U.S. coinage has since been made up mostly of cheaper nickel and copper.
CURRENCY FORECAST: similar to gold, silver prices are tied to the US-dollar, thus the outlook for a much lower USD is indeed bullish for silver. When gold makes its move to a higher price level (see write-up on GOLD in this BI.C currency index for a complete discussion), silver will most likely follow its cousin north. Historically, silver has been valued at 1/16th the value of gold. Today, this ratio is off the map with silver tremendoulsy undervalued at a ratio of approximately 1/66th the price of gold assuming a 400 USD to 1 XAU (ounce of gold).
Three phases to the upcoming gold & silver bull market include the first phase that is in process: devaluation of the the USD (year 2002 to ?), to be followed by an investment demand and finally global public panic buying driving the precious metals to unprecedented heights. The silver market is quite small for investment, any global interest in significant buying will move the silver market tremendously in price. Some analysts suggest that both silver and gold will return to the global monetary system in a significant manner as many fiat currencies are losing confidence and value. Recently, this is most evident with the introduction of the Islamic gold dinar as a new trading currency for commercial transactions in parts of Asia and the Middle East. The Islamic world is also now producing silver dinars for use as money in addition to the gold dinars as mentioned. A speculative frenzy may push silver valuations upwards of 100 USD to 1 XAG by year 2010, an interesting medium to long term speculation indeed.
UPDATED: September 10, 2004
