More silver than you imagined

From 123 Gold: http://www.321gold.com/editorials/taylor_m/taylor_m_042511.html

 

 

Mark Taylor
aka Zorro
Apr 25, 2011

The chart below is a picture of the silver market... now read its story.

Having risen from an average price of $5.00 to $46.05 an ounce, it is only reasonable that one question what may be occurring in the silver market. A well read Investor will certainly have considered many explanations as to why the price of silver has increased over the past 7 years. The most common argument for this, is an extreme shortage of the metal. Without a doubt, if there is a shortage of silver in the market, one would expect the price to rise. Let's take a look.
Below is a trusted account of supply and demand statistics. I say trusted because everyone from market technicians to the US geological survey (USGS) relies on this data. This data is from the Silver Institute and can be seen at their website.

World Silver Supply and Demand
(in millions of ounces)

As you can see, demand for silver has been quite steady for most of the past decade. However, the year 2010 experienced a 190.8 million ounce increase in demand from an average of 866 million ounces per year from 2001 – 2009. Please note that whether it was through mine production, government sales, or reclaimed scrap, all silver demand was met.
Of particular interest is the data from the following four categories; implied net investment, coins and medals, silverware, and jewelry. The importance of these categories lies in the fact that the listed amounts of silver must be seen as actual above ground supply. To imagine that it is not available as recoverable scrap or investment grade silver, is a huge mistake.
We will start with implied net investment. This category includes physical silver that is held by an ETF such as SLV, a fund such as CEF or PSLV, and silver held in various commodity warehouses such as COMEX and TOCOM. The total amount of investment silver (spanning a ten year period) at the end of 2010, was 471.2 million ounces. Interested (as you may be) in more recent figures, I conducted a search of these various funds and commodity exchanges on March 11, 2011 and found that 486,697,829 ounces of investment grade silver is held in various vaults around the world.
By now I think you know what I'm getting at so I will make this brief and combine the three remaining categories. Over the past ten years alone, 2,816,200,000 ounces of silver were used to make jewelry, silverware, coins, and medals. Add this to the silver held as implied investment and you will find that there is quite a bit of silver floating around out there... 3.3 billion ounces if you like simple math.
One may argue that this is not a lot of silver, but this is just from the past ten years. If you care to look at the USGS website, and silver mined over the past 110 years, you will find that 1,075,880 metric tons of silver has been refined. How much silver is that in ounces? 34.5 billion. Now you may be thinking there can't be much silver left to mine, so we are still going to have a shortage some day. Again we can look to the USGS website and find that there are 510,000 metric tons of known silver reserves worldwide. This is silver that has been located and is currently being mined, or is slated for future mining. Using demand from the year 2010, of 1 billion ounces, it would take a little over 16 years to deplete these known reserves. Of course one might say, “you see, we will run out of silver”. However as mentioned, we must consider the silver that is already above ground. In the ten year period discussed, an average 29% of yearly supply was used to fabricate jewelry, coins, medals, and silverware. We can assume that over the past 110 years, no less than this average amount was used for these purposes. This leaves us with a very conservative estimate of 10 billion ounces of above ground supply. From this very simple example, we know there is at least a 26 year supply of known reserves above and below ground.
It has been suggested by many, that most of the silver ever mined has been lost to landfills or used in such a manner that it is not recoverable. First, I find the notion of having thrown (over the past 110 years) 10 billion ounces of silverware, coins, medals, and jewelry into a trash heap, preposterous. As for that which may have ended up in the dump or is not recoverable, we need to look at one more category. This is industrial applications, and during the past ten years, a little over 3.4 billion ounces of silver was used in industry. In the year 2000, the USGS estimated that 30% of this silver was being recovered through recycling in the US. This is when silver was selling at an average price of $5.00 an ounce. With the ever-rising price of silver, copper, zinc, and other metals, it is hard to imagine that the recycling industry will do anything but grow. Needless to say, the idea that industrial silver is permanently consumed and not recoverable, is equally absurd as having thrown any real amount of silver into the trash. Perhaps the most profitable mining in the future may occur just down the street, at your local dump.
The purpose of this discussion has been to inform the reader as to how much silver is really out there. Perhaps one may experience a delay in acquiring specific forms of silver such as minted coins and the like, but this is a production issue, not an overall supply issue. It is important to recognize that all 2010 demand exceeding the average 866 million ounces per year (for the prior 9 years) was from investment silver and coins. In fact, if it were not for the “investment” component of the silver market, demand for the metal would have decreased significantly over the past seven years.
So if there is no shortage of silver, what is causing the price to rise? Certainly an increase in production costs would cause prices to rise, but by more than 900 percent in seven years? I don't think so. Further studies of the market do point to another area. You may wish to read all about it in my next feature, Speculation Incorporated. In the meantime, I think it wise that an investor in silver be quite wary of current pricing. Remember the “great silver melt” of the 1970s and know now, as it was experienced then, there is a lot of silver out there.
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Mark Taylor
aka Zorro
website: www.dowtheoryproject.com
email: usspeculator@aol.com
At dowtheoryproject.com we not only watch the pattern of price behavior for many commodities, we keep a close watch on who is responsible for that behavior.
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