Silver offers a golden opportunity

An extremely bright future for silver jewellery is one of several reasons to be extremely bullish about silver.

To put the jewellery market into context, total jewellery demand was a little over 2,600 tonnes in 2008 (using numbers supplied by the World Gold Council and The Silver Institute). As a result of the chaos in markets and the global recession which took hold in the second half of last year, this is down roughly 10% from jewellery consumption in 2007, and slightly lower than 2006 demand. Thus the 2,600-tonne figure should be considered a minimum consumption level for jewellery globally.

Of this total consumption, gold jewellery comprised over 80%. Put another way, silver jewellery represented less than a fifth of total demand. The demand for gold jewellery has fallen in the last couple of years — as a response to gold rising to a new, (nominal) record-price of over $1000 an ounce (oz).

However, that drop in demand has been quite modest, given the magnitude of the rise in price.

While gold jewellery demand dropped 12% from 2007 to 2008 (due to the impact of the global recession), the demand in ’08 was only about 5% lower than in 2006. This easing in demand has had no negative impact on the price of gold, since it has been more than offset by increasing investment demand.

Furthermore, this modest decline in demand should not be seen as a lessening of desire to own gold jewellery — indeed, quite the opposite. As a general principle, all “luxury goods” are coveted more as the price rises, since it is a fact of human nature that those wealthy enough to purchase/ own luxury goods do so in part to demonstrate (or flaunt) their wealth to other members of society.

Thus, the desire to own gold jewellery increases as the price of gold increases. The slight drop-off in demand is due entirely to the fact that gold has risen to a price which makes it unaffordable to a significant number of previous buyers.

This brings us to silver. With silver also being a “precious metal”, the obvious question which comes to mind is why does silver jewellery represent less than a fifth of total jewellery demand? Like gold, the price of silver has more than tripled this decade. However, unlike gold, demand for silver jewellery is limited by the fact that silver is too cheap.

Despite silver’s aesthetic qualities, owning/ wearing jewellery made from a metal which currently costs less than $15/oz is hardly the “status symbol” for jewellery owners — especially when compared to jewellery made from a metal which currently costs roughly seventy times more (one of the most lop-sided gold/ silver price ratios in history).

Therefore, it is a matter of basic logic (and arithmetic) that as the price of silver increases, the demand for silver jewellery will also increase.

As with gold, annual mine production of silver (the primary source of supply) is flat. Like gold, the investment demand for silver has been soaring, even as the prices of precious metals have also risen.

However, silver benefits from two extremely important supply/ demand fundamentals which are completely absent from the gold market. First of all, for many “market experts” who are uneducated about precious metals, silver is now referred to as an “industrial metal” — despite 5,000 years of history as a “precious metal”.

The reason for this ignorance is that silver also possesses many extremely useful chemical/ metallurgical properties which has resulted in the massive consumption of silver in a variety of industrial applications.

For many years, silver’s use in photographic film dominated its industrial uses. However, even as that use has dropped off dramatically with the rise of digital photography, countless other industrial applications have recently been discovered — which more than offset the decline in that one source of demand. In fact, during this decade, new patents for silver exceed those for any other metal.

This brings us to the most important fundamental for the silver market: the world’s supply of silver is (literally) being rapidly “consumed”.

The evaporation of stockpiles has occurred because the vast majority of silver used “industrially” is in products where silver is used in tiny quantities. Because of this, it is impractical (if not impossible) to recover/ recycle this silver — meaning it is effectively gone forever (or “consumed”). 

When I refer to silver stockpiles being “consumed”, I am not referring to some gradual decline. Over the last 50 years, roughly 90% of global silver stockpiles have been permanently consumed. As a result, while the price of gold (versus silver) has rarely been higher in history, the supply of silver (versus gold) has never been lower.

Thus, based on these extremely strong supply/ demand fundamentals (excluding the global jewellery market), it is not a question of “if” the price of silver will rise, but rather how many multiples of the current price will it rise. Basic economic analysis tells us that a ten-fold increase in price would not be the least bit surprising.

So, let’s look at silver as jewellery. As I said, the relatively modest demand for silver as jewellery is due to the fact that silver is too cheap, and that demand for silver jewellery would be certain to increase with any substantial increase in price.

While all prices have been inflated over that time, it would seem reasonable to project that as silver approaches $50/oz, or perhaps even $30/oz, global demand for silver jewellery will soar.

This explosion will be occurring at a time when the rising price of gold makes it increasingly unaffordable for many jewellery-buyers — further amplifying demand for silver jewellery.

Let the “experts” continue to snub silver. They don’t deserve to share in the future profits which will accrue for all silver-holders. There is currently no investment opportunity in the world as golden as silver.

The writer is editor of bullionbullscanada.com  and can be reached at j.nielson@shaw.com.

This is a condensed version of an article that  appeared on http://www.bullionbullscanada.com/index.php?option=com_content&view=article& id=1808:silver-the-future-of-jewelry&catid=49: silver-commentary&Itemid=130. 
Reprinted with permission of the author.