The case for silver is similar to the case for gold – it is money, has been that way throughout history, etc. But it differs in some significant aspects. Silver is mostly viewed as an industrial metal with monetary characteristics, unlike gold which is purely a monetary metal with some industrial use. Total stock – total demand analysis is the only way to look at gold demand-supply dynamics since supply equals stock. Gold production is only going to add about 2-3% to the total gold stock – which remains intact since ancient times as gold doesn’t get ‘used up’.
The demand-supply analysis for silver can be done the conventional way, looking at exchange demand and supply since exchange demand is mostly demand for consumption. As I mentioned earlier, silver gets consumed in industrial uses and scrap silver isn’t a huge part of the supply. Recoveries are low due to current low silver prices. So, what does the demand-supply dynamic look like?
Higher supply than demand over ten years of data? How exactly is that bullish for silver? Ah, because the demand shown here is only for industrial use which includes: electrical and electronics, brazing alloys and solders, photography, photovoltaic and other industrial uses. This completely leaves out the demand for silverware, silver coins and bars and silver jewellery. Taking that as well into consideration:
There are years where demand outstrips supply, and years where supply outstrips demand. Starting to look interesting, but still doesn’t add up to a bullish outlook on silver. Is there something I have left out? You guessed it! We’re talking exchange demand and supply here. Inventory additions and deletions do not yet figure into this. Who holds inventory? The major commodity exchanges, for example, the COMEX. Also, the Exchange Traded Funds which issue shares representing physical silver they hold in trust. The most popular of these is the SLV ETF. Authorized participants can exchange silver for shares and vice-versa, affecting inventories at the ETF. Futures market participants can register their inventory at various exchanges, and the net changes reflect an additional source of silver not included in the above chart. Putting it all together, the demand-supply chart for silver including change in inventory levels looks like:
The silver market has been in a deficit for 9 out of the past 10 years! In 2014, supply exceeded demand by only a tiny margin. That’s quite a bullish sign. Also, there’s this:
Trends can change rapidly. My current analysis is backward-looking, for the most part. What could change in the future?
New production coming online – not in the least likely. Silver is mostly mined as a byproduct of base metal mines (lead, zinc, copper) and gold mines. If you aren’t living under a rock, you know how well miners are doing in the current environment. They sure aren’t going around fattening up their exploration budgets
Rising supply of scrap silver – Recovery of silver from scrap depends on price. I haven’t shown the data here but the correlation between scrap supply and the silver price is 67.9%. Rising silver prices induce higher scrap supply, which would temper the price rise. But considering scrap supply accounts for only 15% of the silver supply, this is not critical
Tapering investment demand for silver – As per U.S. Mint data, 2015 represented a third annual sales record of American Silver Eagles, and more silver coins were sold on the first day of January 2016 than on the entire month of January for years 1987 to 2009
Catalysts for an imminent price rise?
A short squeeze – Short interest on silver at the COMEX represents anywhere between 130-170 days of global mine supply. If the shorts are unable to roll over…
Central banks losing control – game set and match for silver
A note on silver price volatility
Silver prices fluctuate a lot. You might buy today and find yourself up or down 5% tomorrow. No matter. You’re shooting for gains in the 100s of percent and shouldn’t be bothered by short-term price fluctuations. Volatility is your friend as you accumulate your desired position. Good luck investing.
Data source: GFMS, Thomson Reuters, Silver Institute