the case for silver

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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.

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:

I’ll end this article by addressing two common refrains from investing in silver:

  1. Print photography is being replaced by digital photography, hence the demand for silver is going down.
  2. Silver is an industrial metal, as the economy slows down, silver demand will go down, too.


  1. 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.
  2. 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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