China Consumption, Dwindling Supplies Positive Signs For Silver
Thursday, November 3, 2005
By Sean Mason
There was at least one silver anniversary this year that went largely unnoticed. Twenty-five years ago, the Hunt brothers of Texas tried to corner the silver market, sending the price of the precious metal soaring to more than US$50 an ounce. It is arguable that the fundamentals are there for a similar price run today, driven by seemingly-insatiable demand from China.
An attempt to corner the market, like the one the Hunts engineered, isn't likely to repeat, but some analysts predict prices as high as $100 an ounce under certain market conditions, seeing that demand for silver has outstripped supply every year for the last 15 years.
One of the wealthiest families in the United States at the time, the Hunts bought silver as a hedge against inflation, and by 1980, had accumulated more than 200 million ounces of silver -- about half the world's deliverable supply.
As others piled on the Hunts' silver bandwagon, the rules suddenly changed. The New York Metals Market (COMEX) and the Federal Reserve intervened to stymie their plans, and the price plummeted, culminating in a 50% one-day drop on March 27, 1980 from $21.62 to $10.80.
Speculators lost millions as the silver market collapsed. The Hunt brothers, who were highly leveraged, declared bankruptcy and in August of 1988 they were convicted of conspiring to manipulate the market.
Some of the factors that allowed the Hunts to launch their ill-fated drive are present today - high energy prices, skyrocketing commodity demand, and tight supply. And of course, there's China.
GFMS Ltd., an independent London-based precious metals research firm, points out that private individuals in the China were forbidden to own gold and silver up to 1982. In 1993, non-government gold and silver exchanges appeared and the Hoatong Silver Exchange was established in 2000.
But China's rapidly-expanding industrial base might put the greatest pressure on the silver price.
China will someday require more electrical power than any nation on earth. David Morgan of the Silver Investor, a renowned writer of silver investing, reported that American Superconductor shipped 18 miles of High Temperature Superconductor (HTS) to China. The Silver Institute estimates that the demand for HTS may be as high as 50 million ounces on an annual basis.
On the supply side, there is just about 120 million ounces of refined silver in warehouses, this according to the New York Mercantile Exchange. This is less than half of what was available in 1980.
In an interview with StockHouse, David Morgan said silver demand has outstripped supply for at least the last 15 consecutive years: "In the short-term, if silver breaks above $8 an ounce, it could see $10 by April 2006. In the long run, I wouldn't be surprised if silver was trading in the $20 to $30 range, possibly as soon as 2008."
Mr. Morgan, however, says public psychology will play a big part in determining whether silver experiences a significant price spike, such as that in 1980: "The perception of a currency crisis (from the U.S. increasing the money supply) might cause panic buying. If that's the case, all bets are off - silver could hit $100 an ounce."
One of the greatest attributes of silver, according to Mr. Morgan, is that demand is inelastic. Many companies that use silver for industrial purposes "consume the metal in such small amounts that a significant price increase will not cause them to reduce their silver purchases. Honda (NYSE: HMC), for example, uses silver in their cars to prevent the rear windows from fogging," he says.
Canaccord Capital analysts believe that if new applications for silver become popular, the annual deficit could widen to as much 250 million ounces, this as reported by Craig Stanley of ResourceInvestor.com. Some of this deficit has been filled by sales from government stockpiles, although according to the Silver Institute, net government sales fell by 30%, to 61.7 million ounces in 2004, perhaps further evident of dwindling global supply.
According to the Silver Institutes, silver produced at primary mines increased in 2004 by 9% to reach 188.5 million ounces, representing 30% of world silver production, with the balance originating from copper (26%), gold (12%), and lead/zinc mining (32%).
This is, in part, a consequence of the scarcity of large silver deposits, which can be economically exploited at prevailing silver prices. If the price of silver begins to rise significantly, it will become profitable to bring smaller silver mines into production, although that won't happen quickly.
Demand for silver in the future will likely be greater than it was in 1980. Silver jewellery purchases should only increase as per capita incomes rise in India and China. Silver also has new industrial and consumer uses. Silver is being used as a biocide, killing bacteria by breaking down their cell walls with no harmful effects to the human body. It is replacing chlorine in water filtration systems.
The U.S. Senate Subcommittee has held hearings on the use of silver-based biocides as an alternative treatment for wood preservation, according to the Silver Institute. This would replace arsenic compounds, which are toxic to the environment. As well, silver is being used in nasal spray, eye drops, burn ointments, and its fibers are being used to improve bandages.
The Silver Institute states that as a result of the growing popularity of digital cameras, photographic demand in 2004 slipped to 181 million ounces, a 6% decline from the previous year. China, however, experienced an overall 6% growth in traditional photographic demand in 2004.
Governments will also likely continue to use silver in the minting of coins. In 2002, President Bush signed into law legislation that authorizes the U.S. Treasury to buy silver on the open market when the nation's silver stockpile is depleted. Public Law 107-201 will ensure that the largest and most popular silver investment coin program in the world, the American Eagle Silver Bullion program, continues unfettered by disruptions in the U.S. Mint's silver supply, this as posted on the Silver Institute's Web site.
As an alternative to buying the metal itself, a leveraged way to play a possible rise in the price of silver is to purchase shares of the silver producers. There are more than a few Canadian mining companies, both senior and junior, that specialize in silver production and exploration. These include Pan American Silver (TSX: T.PAA) and Scorpio Mining (TSX: V.SPM).
