The case for silver
Posted by ML on November 18th, 2006
Frugal has written about Reasons for Investing in Gold & Silver Market where he presented a compelling case for investing in gold and touched upon the case for silver. It’s a case I want to further develop here.
Silver supply/demand
The structural deficit in silver makes it a compelling investment. This situation is illustrated by the figures from The Silver Institute (the first on supply, the second demand). For years running, mine production and scrap (recycle) have not kept pace with demand and the gap has been met by sales of above ground stock.
The natural follow-up question at this point would be: “what is the remaining above ground stock?” An even better question is, “what is the amount of market accessible silver at $X?” Unfortunately, I’m not sure if anyone knows the answer. There are some estimates, for example, here’s one on how much silver remained in 1992:
Total Silver that remains above-ground (all forms): 19.06 billion ounces
Total Silver contained in silverware and art forms: 16.48 billion ounces
Total Silver contained in bullion form: 1.40 billion ounces
Total Silver contained in coin and medallion form: 1.18 billion ounces
ROHS and silver
Silver is often called the poor man’s gold, but unlike gold which is primarily a monetary metal, it has many industrial. Silver is a known bactericide. Some humidifier currently on the market uses silver rods to kill bacteria. Silver is also a well known conductor of heat and electricity.
As a investor, I’m always on the lookout for new incremental demand of silver. ROHS (Restriction Of Hazardous Substances) presents such a situation. It’s an EU directive banning certain harmful substances from consumer products. One material affected is lead solder in electronic products. The main lead-free alternative is an alloy of tin, silver and copper. My back-of-the-envelop calculation says that to replace all leaded solder requires roughly 50 Moz of silver each year.
The current annual silver consumption is about 900 Moz. To put an extra 50 Moz/year into perspective, note that in the crude market six month ago, all the spare capacity in the world was an extra 1 Mbbl/day from the Saudis, while world consumption was 80+ Mbbl/day. We all know what happed to oil prices then. ROHS was implemented this July and California will likely follow suit. If this trend takes hold, it will be an additional drain on an already tight supply/demand relationship.
Gold/silver ratio
So how does silver compare with the other precious metal, gold? The chart below shows 600 yrs of price history and the corresponding gold/silver ratio. The real silver price peaked around the time of Medici and has been heading down every since. Even the corner by the Hunt brothers that sent the price to $50/oz only brought the real price to the level of the 1880’s. The gold/silver ratio remained near 16:1 for centuries before rocketing up. Today it stands at 621.8/12.73=48.8.
Click to enlarge
The historic ratio of 16:1 is not far from the ratio of silver to gold in earth’s crust which is 17.5:1 (see ref 3 here). On the other hand, silver analyst Ted Butler has claimed that silver is more rare than gold when comparing accessible stock piles in bullion form. A more complete study of the existing above ground supply by David Zurbuchen found the silver/gold ratio to be 5.88:1. No matter how you cut it, any reversion to the lower ratios would imply that silver will appreciate much faster than gold in this bull market.
Silver plays
There are may ways to invest in silver:
- Silver bullion: read my article here, or Frugal’s
- Silver ETF: SLV (CEF is another possibility. It has about 50% silver.)
- Silver stocks: SSRI, PAAS, SLW, CDE, HL, SIL, MGN and others, see references below
- UBS report on silver producers (via Bill Cara)
- Silver Investor, David Morgan’s newsletter
- Jason Hommel’s Silver Stock Report
I’ll end this article by addressing two common refrains from investing in silver:
- Print photography is being replaced by digital photography, hence the demand for silver is going down.
- Silver is an industrial metal, as the economy slows down, silver demand will go down, too.
Rebuttal:
- From the latest World Silver Survey, 2005 photography use was 164.8 Moz down from 181 Moz in 2004. However, this is only one side of the coin. A large part of the scrap supply comes from recycling photographic films and solutions. If 70% of the 2005 scrap supply (187.3 Moz) came from photography, net photography use was only 33.7 Moz, to be further off-set by the silver went into digital cameras and printers. The truth is that silver demand has been climbing even though print photography is rapidly going out of fashion.
- Using 2005 as an example, only 29% of the mined silver came from primary silver mines. Fully 59% were byproducts of zinc, lead and copper mining. Since base metals are more economically sensitive, silver supply is expected to reduce during hard times, cushioning the impact of lower demand.
Like gold, silver is extremely volatile, so please make sure it is for you and observe strict allocation and stop-loss rules. Please do you due diligence before making any financial decisions.
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November 18th, 2006 at 11:01 pm
I actually made some money on physical silver bullion back in the days when the Hunt bros. tried to corner the market. It was only a couple of kg, and I was lucky to sell out at a good profit (I didn’t even know what the Hunt bros were up to until later on, but I could spot a bubble when I saw one).
These days I don’t have much bullion, but I’m thinking of adding a small amount to my portfolio. I might buy a couple of kg bars for fun - they make cool paperweights!
Regards
http://enoughwealth.blogspot.com
November 19th, 2006 at 9:05 am
I actually had some luck selling silver this year, as well. Gold, too. It’s a good time to sell precious metals these days.
http://1sttimeinvestor.blogspot.com/2006/10/selling-precious-metals.html
November 20th, 2006 at 4:12 pm
EW,
Glad to hear from someone who has 1st hand experience with the silver market then. I think the Hunts ran silver up to $50 but it lasted very briefly, so congrats for getting out early.
BTW, I like the name of your blog.
ML
November 20th, 2006 at 7:00 pm
I’m a new visitor to this site where I came here with a google search on Cananadian trusts to find out when the tax changes were kicking in. (By the way I have European gas fund NRT that I like).
Back on topic :I work in the Semiconductor industry and can confirm the silver increase with RoHS usage. One of the preferred solder compositions for leadfree is SAC (SnAgCu) where silver content is 3 to 4%. In terms of semiconductors the usage today may be small as it is Ball grid array (BGA) type packages that really use SAC (BGA has solder balls on the bottom of the package). The older lower tech surface mount devices (SMT) may use leadframe finishes such as NiPdAu that have no silver content. Btw: The Au content of NiPdAu is insignifant to get excited about (a few angstoms!). When Au is used is as bond wires and for older package technologies, is the largest piece cost of semiconductor package breakdown. However, compared to silicon and cost of test, it is also not that large.
Biggest users for RoHS will be on the solder paste and PCBs. In terms of semiconductors sold worldwide, Europe is in fact the smallest market. Even in EU, Car and Telecom manufactures were given a waiver to push out date of ROHS.
Whilst RoHS is European Union at this time, China is giving mixed signals on adopting something similar. I say mixed signals as they want to move but we cannot understand when !! Bulk of Electronics manufacture is in far East. When these guys move, that is when real demand of silver will happen from electronics point of view.
Japan also seems to be moving in this direction but with no Government mandate. Move seems to be product positioning of green.
On technology front, as advanced Semiconductors decrease in geometry they run hotter.
However, the higher the junction temp, the lower the operating frequency of the device. To get the heat off the chip requires innovative thermal management. One way is to take the heat from bottom of chip to copper slug that is soldered to the PCB. The “die attach” material has to be good adhesive but also good thermal conductor. One technique for a good thermal conductor comes from adding very finely milled silver. I am keeping my eye on this trend. May not be a big usage but may start gradual trend.
To my knowledge not of the electronic companies recycle silver. Gold maybe.
November 22nd, 2006 at 7:10 am
Captain,
Thanks for a very expert review of silver use in the electronics industry. I hope RoHS or something similar becomes more widely adopted.
I have some experience in basic device research. Silver is one of the easiest metals to deposit. Some cutting edge organic photovoltaic cells contain a smidgen of silver (angstroms). Unfortunately they are still at the research stage.
ML
December 8th, 2006 at 7:38 pm
I have been bullish long term on silver for some years, but as I earn my state minimum wage, I have never had a significant stake to invest. A couple years ago I bought a small quantity of U.S. 90% silver coins at 4.7 times face value. Based on current prices I’m up 100% in two years, with which I am pleased.
But as one with scant disposable income, occasionally (fortunately not more than once a year) some unexpected(ly large) expense arises and I scurry for cash.
Being bullish long term, I do not wish to sell my silver, and would rather borrow against it instead. Good luck with that! Pawn shops don’t want to loan on bullion, and would rather squeeze me into a lowball sale which I am unwilling to do. (They are happy to buy my coins for 5 or 6 x face.)
Any suggestions here? Should I just go ahead and sell out and convert my silver to cash for those times of penury?
December 10th, 2006 at 10:29 pm
Terry,
I’m really sorry to hear about your situation. At no time will I put investment above day-to-day living. so the best suggestion I can give is to get a fair price for your silver by trying www.tulving.com or www.nwtmint.com and keep the proceeds in a high rate savings account.
You can consider opening a Zecco account with > $2k and buy some SLV, the silver ETF. That way you can have ready access to your money while maintaining the exposure to silver. You get zero commission trades with Zecco and the expense ratio of SLV is only about 0.5% per year.
ML
March 14th, 2008 at 6:01 am
That is a great article about the forces which will drive up the price of silver. I think getting in is still easy but getting out at the right time will be hard. The RMA indicator was a good sell signal at the 2006 May crash and it is signaling another crash at the moment, but I am not sure if it is true this time. www.silvertelegraph.com has a daily updated RMA Chart.
March 15th, 2008 at 7:02 pm
Thomas,
I agree that Silver is not yet ready to correct from here. I would give it at least another month.
ML