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Six reasons for you to purchase silver now, despite high prices

Sunday, 20 February 2011 - 11:17pm IST | Agency: DNA
In the last one year, silver has given a return of around 100% in dollar terms and 84% in rupee terms.

Silver prices have been going up for a while. On Saturday, Silver closed at an all-time high of Rs 48,700. In the last one year, silver has given a return of around 100% in dollar terms and 84% in rupee terms.

Still, it makes sense to buy silver. Here are six good reasons:

1. China has turned net importer
China, the biggest commodity guzzler in the world, is importing silver big time. In fact, in 2005, China exported 100 million ounces of silver (one troy ounce = 31.1 grams). In 2010, five years down the line, the country has turned a net importer, importing 122.6 million ounces, which is around 14% of the global production.

Now, we all know the impact China has on the price of a commodity it takes fancy to. India, the biggest consumer of gold and silver in the world, imported 1,200 tonnes of silver in 2010, up 20% from the previous year. This increase in imports has largely been attributed to increase in the price of gold, thus making gold jewellery very expensive.  This has made people in these countries turn to silver jewellery. In fact, as the price of silver keeps going up, more and more people are likely to take fancy to silver jewellery.

2. Supply demand mismatch
This is a very basic point, which is behind every price rise. Silver demand is more than silver supply, and thus the prices have been on a run. The Silver Institute, which tracks silver supply, reports that from 2000 to 2009 (the latest data available), the supply of silver went up to 709.6 million ounces, up from 591 million ounces. This shows an increase of around 2% per year.

Data from the CPM group shows that mine production rose to 741.5 million ounces in 2010 (up around 4% from 2009). 
Silver demand in 2009 stood at around 889 million ounces and the difference between supply and demand was largely met out of scrap sales. Given this, nearly 19% of silver demand is being meant out of scrap sale. This is not sustainable.

3. No recycling of silver
One way to increase supply is to recycle silver like gold has been over the years. Silver is largely used as an industrial metal. It is a very good conductor of electricity, the best heat transfer agent and reflector of light, a very good lubricant, catalyst and alloy. But it is used in very small amounts as an industrial metal. Given this, it is not easy to recycle silver.

Also, at its current price, it is not monetarily feasible to recycle silver. Experts are of the view recycling will become monetarily feasible only once the price of silver crosses around $50 per ounce (currently it quotes at around $32-33 per ounce). Given these reasons, increasing sale of silver scrap is not very easy.

4. Not easy to ramp up production
Experts who closely track silver believe the world is running out of silver. The most vociferous of this lot, Adrian Douglas, the proprietor of Market Force Analysis and also a director of GATA (the Gold Anti-Trust Action Committee), has gone on record to say the world will run out of silver in 2020, and thus become the first element of the periodic table to become extinct.

Theodore Butler, silver analyst, Butler Research, has said in the past that silver inventories have declined from 10 billion ounces (one ounce equals 31.1 grams) in 1940 to 1 billion ounces today. In comparison, gold inventories stand at a total around 5 billion ounces. So, if we were to believe these experts, there is five times more gold on this earth than silver. But does that reflect in the price of these metals? Certainly not.

This decreasing inventory cannot be built up through increase in production. The earth’s crust has around 17 times more silver than gold. Despite this, silver production cannot be ramped up quickly. The primary reason for this is that it is rare to find a pure silver deposit. Hence, nearly two thirds of the silver that is mined comes as a by-product of mining other metals, like copper, zinc and lead. So, increased production of silver in turn depends on the price of the other metals it is co-mined with.

Also, the silver “mine-cycle” is around 10 years, i.e. the time it takes from starting to explore for silver and until the mine finally begins to produce silver. Over the years, the low price of silver has ensured that the mining companies haven’t gotten around to looking for silver.

5. New uses of silver
As mentioned earlier, silver has lots of industrial uses, given that it is the most malleable and ductile metal, after gold. Silver is currently used in electrical applications like conductors, switches, fuses etc. It is also used in photography, and silver alloys are used as cathodes in batteries. Interestingly, the new uses of silver keep growing.

As a recent report from Hinde Capital points out, “As a bactericide, silver is used in water purification and air handling systems. Silver is also a natural biocide and is very effective against bacterial infections such... New products using silver’s biocidal qualities are being developed each year; clothing, bandages, toothbrushes, door-knobs (flu-protection), keyboards, the list goes on growing.”
All this will ensure the demand for silver keeps growing.

6. The investment argument 
Investors are gradually realising the potential of silver. This has led to an increased demand for silver coins as well as exchange traded funds worldwide. The US Mint sold more than 6.4 million silver eagles this January —- the highest sales in a single month since the coin was introduced way back in 1986.

Eric Sprott, who runs Canada-based Sprott Hedge Fund and who recently launched a silver fund, made a very interesting point during an interview. His new fund entered the market to buy 1 million ounces of physical silver. The silver wasn’t readily available and it took the fund nearly 10 weeks to acquire the entire lot.

Now, this was the impact of just one fund. Imagine what would happen once a few more silver funds are launched.
In fact, data from the Silver Institute shows that the investment demand for silver went up by a whopping 184% to 136.9 million ounces in the year 2009 (the latest data i.e. available).
Moral of the story: Buy silver.

The writer works in the financial services industry and can be reached at chandniburman@yahoo.com. Views are personal.

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