New data reveal bullish picture...
CPM GROUP recently published their 2011 Silver Yearbook, one of the industry's most comprehensive sources of information on the silver market. It's mainly a reference book, but I uncovered some interesting facts that paint a decidedly bullish picture for the metal going forward, writes Jeff Clark, editor of Casey Research's Big Gold newsletter.
If you're a silver investor, or are concerned about the recent selloff, you may find the following data very compelling. It provides an inside track on the market and will certainly make us all more knowledgeable investors.
For fun, I put what I read into the form of a quiz. See how many you can get correct…
Question 1) The #1 driver for silver's price increase in 2010 was:
a) Investment demand
b) Fabrication demand
c) Lower supply
While both fabrication demand and supply rose last year, investors bought 142 million ounces of silver – the third highest level on record, and the highest since 1980. This pushed the price into record territory.
It's noteworthy that investment demand was higher last year than during the recession year of 2009. This suggests that investors buy silver more out of Dollar devaluation and inflation fears than simply due to an economic contraction.
Question 2) Silver mine production:
a) Exceeds demand
b) Matches demand
c) Falls short of demand
Silver produced from worldwide mining totaled 667 million ounces last year – but total demand hit 986 million ounces. Despite the fact that mine production has increased 33% since 1999, it falls far short of supplying the market's needs.
While scrap coming to market makes up the difference, this gap is one of the more critical issues going forward. The delicate balance between supply and demand will become increasingly precarious as overall demand continues to grow.
Question 3) Household demand for silver (cutlery, flatware, and candlesticks) hasn't risen in ten years. Jewelry fabrication is up but a blip. Silver use in photography continues to fall. So, true or false?: Total demand is falling.
False. Industrial use has more than made up the difference from declines in other uses, and is pushing demand to new levels. Since 1999, consumption in electronics has increased 120%. Silver usage in solar panels began in 2000 and is up 640% since then. Silver was first used in biocides (antibacterial agents) in 2002 and, while a small niche, it has already grown sixfold. In fact, new uses for silver are being found almost every day, particularly in the biocide arena, making it increasingly difficult to catalog all its growing applications.
The Silver Institute forecasts that total industrial use of the metal will rise 36% over the next five years, to 666 million troy ounces annually. That's a lot of silver, meaning this portion of demand – which is roughly 60% of all fabrication – isn't letting up any time soon.
Question 4) Silver represented what percent of global financial assets at the end of 2010?
D. In spite of last year's record-high prices, silver is, by any account, a miniscule portion of the world's wealth.
The ratio's high occurred in 1980, reaching 0.34% of financial assets. Silver as a percentage of global assets would have to grow over 48 times to match the record. It is true that many more paper assets exist today than 30 years ago, but the renaissance in silver will continue to increase its portion of worldwide assets.
Question 5) The largest manufacturer of silver coins is the US Mint, which sold 34.7 million ounces last year, about 46% of the world total. What country is the second largest?
d) South Africa
The Austrian Mint contributed 15% of total silver coin sales last year (11.4 million ounces), an increase of 26% over 2009.
Still, the American Silver Eagle rules the global roost. Given how recognizable it is around the world, it's what to buy if you don't own enough metal.
Question 6) Of the following groups of countries, which is increasing silver production and which is in decline?
a) Mexico, Australia, China, Argentina
b) Peru, US, Canada
Countries in group A are increasing production, while to the surprise of many, each one in group B is in decline.
This has direct ramifications for your silver stock investments. Total newly refined supply is expected to surpass one billion ounces for the first time in history this year, so make sure you have some exposure to countries where production is growing.
Question 7) The average cash cost to produce an ounce of silver from primary silver mines is:
Of the 30 primary silver mines in the world, average cash cost rang in at $5.16 per ounce (net of byproduct credits). This is almost double 2002 levels. The Silver Price has risen 650% in the same time frame, however, so margins have risen in spite of higher costs.
Question 8) The only governments that hold silver in inventory are the US, Mexico, and India. How many combined ounces do they hold?
a) 55 million
b) 155 million
c) 255 million
d) 355 million
Only 55 million ounces are estimated to be stored in these three countries. This equals only 5.6% of annual global demand. Governments held approximately 355 million ounces in 1970, but this has diminished largely due to the US decision to stop using silver in its currency in the 1960s and other governments following suit.
No other countries are believed to hold any silver in inventory. Mine production and scrap supply had better keep up, because there is no backup source.
Question 9) China accounts for how much of worldwide mine production?
Chinese mine supply totaled 102.7 million ounces last year, 16% of global production. China is the third largest silver producer, behind Mexico and Peru.
Mine production in China has more than doubled just since 2000, largely due to Beijing's decision to deregulate the state-controlled market the year before. This trend is certain to continue, due to rising Silver Prices and the fact that many parts of the country are underexplored. If you don't own a Chinese silver producer, you're missing out on some of the most explosive growth around the globe.
Question 10) What is the weakest month of the year for the Silver Price?
Summer is usually the most sluggish time of the year for silver, and July is historically the weakest. Got your dealer's number handy?
It's clear that the forces underpinning the silver bull market aren't going away any time soon. Demand is high, but it's not an anomaly when viewed through an historical lens. Silver has been used as money for over 3,000 years, and the word for "money" in many languages is "silver."
Meanwhile, our current monetary issues are far from over, won't be easily resolved, and will take years to play out. Precious metals are proven forms of protection for this environment. Silver, along with gold, is your best defense against unsustainable fiscal imbalances and massive currency debasement, and will be a profit center for years to come.
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