Tuesday, October 17, 2006

Silver Fundamentals

How much silver is there?

This is a question often asked by silver investors; the answer is no one really knows. I’ve seen widely differing estimates but the majority seem to be in the range of 600-800 million ounces. Most stockpiles in government or commodity brokers vaults are quantified but there are issues such as hidden hoards, variables of jewellery recycle rates at any particular price, and the true amount of remaining junk silver coin all cloud the real number. With this in mind, I’m going to go with the high end of the average range and state there are appox. 800 million ounces of silver above ground.

How much is 800 million ounces?

800 million ounces is a drop in the bucket considering that at its peak in 1950 the world’s stockpile of silver was estimated at 10 billion ounces. 800 million ounces represents less than 1 year’s supply at current usage levels. In 2005 864.4 million ounces of silver were used in fabrication and a further 47.5 million were purchased as investments.
This sets 2005 silver demand at 911.9 million ounces.

How much is supplied to the market each year?

The silver institute states that the total supply for 2005 was 911.9 million ounces broken down as follows:
Mine production 641.6 million ounces
Net Government sales 68 million ounces
Recycled scrap silver 187.3 million ounces
Producer hedging 15.1 million ounces

The most important thing to note in these figures is the net government sales of 68 million ounces. For decades governments have been supporting the artificially low price of silver by making sure that there is sufficient supply to meet industrial demand from their own stockpiles. Production and recycling have not been able to meet demand for most of the last 40 years so governments have allowed their private stashes to be used up for the benefit of industry. This will soon come to an end as government stockpiles of silver have been largely used up. Smart holders of silver now see the shortages coming and refuse to sell at today’s unrealistic low price, meanwhile silver investors who were nearly invisible for decades have absorbed 47 millions of ounces in 2005 alone The greatest sign of imminent shortage is the U.S. government who once had the largest bullion reserves in the world had to buy silver to produce the Silver Eagle coin in 2005.

So if it took 68 million ounces of government sales to meet 2005 demand than this amount of silver represents a reduction in stockpiles. In the last 10 years 557.2 million ounces of silver has been sold by governments around the world. These constant government silver sales are not sustainable, the slush fund has nearly run dry and soon there will be no stockpiles to make up the difference betweens supply and demand.

A great deal of silver is consumed by industry. In 2005 570 million ounces were used in industry and photography, in the same year only 187 million ounces was recycled for a net loss of 383 million ounces of silver consumed or lost forever. This destruction is the reason silver is becoming scarce.

Jewellery and silver ware have added costs attributed to the labour and marketing of these products. This means that at current prices these items, unless broken are not likely to enter the supply chain as recycled silver. I’ve seen estimates that it would take $50 silver or higher to move any significant amount of scrap from these sources. Additionaly these items often hold sentimental value making them not for sale or would be even more desirable to keep should they appreciate in price. I do not think an increase in scrap rates will fix the supply/demand shortage.

To be fair demand in some sectors like photography demand has been dropping but overall industrial use, total fabrication and total demand are still trending higher as more industrial uses for silver are discovered. As prices have risen over the last few years supply from mining has increased but it has not been able to offset the need for government sales or the strong new investment demand. Additionally 168 million ounces of silver have been taken off the market to back the Barclay’s silver ETF

What does all this mean?

Silver is a bargain at today’s prices. Silver stocks are dwindling and we may be staring at the beginning of the strongest bull market of your lifetime. At today’s supply there is only 24 ounces of silver available for each Canadian or 1/10 of an ounce for each person on the world. Silver is in such short supply that at this moment 5x more gold exists in vaults than silver. That's right! A $13 Can. metal is rarer than a $670 Can. metal. Do you honestly think the price will stay this way once the market notices the real rarity of silver? I Don't.

Silver will never be in this price range again once the truth about silver supply becomes commonly known. I am comfortable estimating $100 silver and I will not sell any of mine until it hits this price. I will buy until it hits $20 and I would take a loan to buy at $10 dollars. The current $13 dollar Canadian range is certainly a buy. $1300 dollars will buy you a nice 100 oz bar which I firmly believe will be worth $10,000 in less than 5 years and unlike paper money or stocks, silver has never had zero value. Start smaller if that fit's your finances but don't ignore this rare opportunity, an opportunity rarer than gold!

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