Silver in the
As some of you know, I have finished a new seminar recently that I have only presented one time. This presentation focused on what is expected in the silver market for the next decade. Frankly, when beginning this study I was not really certain what conclusions could be determined about the future of the silver market. The main thinking was that the investment demand for silver would drive the price far higher than present and this is in fact the case as we go through this report. But it was also determined that silver's unique properties will be in higher and higher industrial demand over the next decade as well.
Before going into detail, it must be stated that anytime a long-term projection of anything is presented there are bound to be errors. Things change, life is dynamic, there may be new uses for silver in five years that no one is even aware of today. Secondly, there may be a substitute for silver discovered that might impact overall demand. However, as you study this month's issue keep in mind the facts as they are presented, and think through the ideas and projections to make your own conclusions.
In an effort to not show my bias toward the bullish case for silver, there are areas that are presented with little mention of increasing demand. For example, the consumer electronic area is one that we assume is static in this report. Certainly, if the economy improves or perhaps if it does not, a good case can be made that more electronic appliances will be in use on a worldwide basis over the next decade.
However, this study assumed little to no growth for two reasons. One: it is a more conservative approach, meaning that the forecast for silver demand will probably be better than projected. And two: the amount of recycled silver from electronics is increasing due to the amount of printed circuit boards that are recycled.
Something I have presented on many occasions is that silver is "uneconomic" to retrieve in many electronic applications, and this is the truth. However, governments do not have to run at a profit and can mandate almost anything these days, so in California, for just one example, silver, lead, zinc, etc., are demanded to be captured for environmental reasons and at a far greater cost than breakeven. Please understand that this is not a judgment call on our part but only a clarification of the fact that some silver is recycled - that is done, but not on an economic basis.
Further, gold is used in many of the printed circuit (pc) boards and is economic if enough pc boards are processed. Since silver is almost always on the same pc then obviously the silver is captured as well. So to be conservative, the idea is that although the consumer electronics portion of demand will increase, so will the amount of recycled silver. And for the purposes of this analysis, we will consider the growth to recycle rate to remain in balance over the next ten years. You do not have to agree with this assessment - just be aware of it.
If we examine the past decade we will find some interesting facts about the silver market, and for this report to carry the most meaning, it is important to review some of the most important points about the silver market from roughly 2000 to 2010.
The first fact is that the industrial demand was roughly 35% of the total market but by 2010 the industrial component was 54% of the total market, according to the Silver Institute.
The silver market was in a deficit situation from about 1990 and carried through until 2007 or so, when, according to both the Silver Institute and CPM Group, the total amount of mining had brought silver annual demand and annual supply into balance. Up until that time period, the aboveground silver supply was disappearing rapidly at a rate of roughly 100 million ounces per year. From 1990 to 2007, according to the best recognized studies on the silver market, about 1.5 billion ounces of silver were eaten out of stockpiles.
For the purposes of this analysis we are going to assume that silver supply is going to continue in the region of a 2%-per-year increase, for the next ten years.
What about future production?
Those who have studied our work and that of other commentators and analysts in this sector may be familiar with the terms "peak gold" or "peak silver." In fact on a few occasions it has been mentioned that according to the USGS (United States Geological Survey), there is more or less nine years' worth of economic silver in the ground; in other words, peak silver is roughly a decade away. The World Silver Extraction analysis above from Mr. L. David Roper gives us a pretty clear picture of what is a good probability of the future of silver extraction. Notice the peak is beyond 2020, and this could be the case if we consider that perhaps silver is only economic for nine or ten more years (at today's prices, so bear that in mind).
However, base metal miners can still be profitable and producing silver as a byproduct through gold, lead, zinc, and copper mining. A word about gold mining and its effect on silver needs to be addressed. Gold mining has most likely peaked, and a full 13% of silver coming to the surface is a result of gold mining. If you take the above curve and slide it to the left where the peak is around 2000 or so, you have a fairly good idea about the real picture in gold mining.
Now just because gold may have peaked and it does contribute to the aboveground silver supply, this is not considered in our overall analysis, because predicting base metal mining is more difficult and a much bigger contributor. But to be explicit in this analysis, it is important that this fact is known. In other words, we are being conservative because the contribution to the silver supply from gold mining is going down, but we will consider it to be level.
According to Stephen Leeb, a well known financial market analyst/commentator and author, it takes 80 tons of silver to produce one gigawatt (GW) of solar power. Most sources agree that about 7 gigawatts of solar-generated energy have been installed at this point in time.
The solar energy demand is now increasing rapidly; in fact, it could be considered exponential growth. The green or clean energy mandate has been declared all over the world, and China has been growing its solar energy base around 100% a year since 2003. Let's be clear - the drive for solar will continue this decade, but in reality it will still account for a very small portion of the total energy produced. To make it crystal clear, there is not enough silver to provide solar energy for the earth's six billion-plus people.
India plans to increase its solar output to 20 gigawatts by 2020, starting from basically nothing currently. China continues to project massive growth from the current 5.5 GW capacity to 30 GW by 2020. The U.S. has forecast a similar amount, perhaps 30 GW by 2020.
On a worldwide basis the generating capacity by 2020 is projected to be 20 to 40 times the amount of current solar capacity. This is a huge compounded rate of use, but according to Jessica Cross, VM Group, her outlook presented at the end of last year to the London Bullion Management Association (LBMA) was for an annual growth rate of 15% over the next ten years.
Even with this more conservative and perhaps more realistic approach, solar demand could reach 130 million ounces per year around 2014 and continue through 2020.
One of the more "unknown" areas is the radio frequency identification device (chip or tag). As stated in my book, Get the Skinny on Silver Investing:
My estimate of 30 million ounces per year is much greater than what was presented to the LBMA by Jessica Cross. Her number is just over 10 million ounces of silver per year. This report does use her number, however, so keep that in mind.
My higher number is based upon the fact that the lowest amount of silver is assumed in her analysis, which means the sensor or scanner is in very close proximity to the actual product. This simply is not true in all cases. In fact, it may turn out that most of the tags used have more silver so they can be read from greater distances. There is no way around this, the physics or electrical properties demand more silver to transmit an electrical signal further. Whether you agree with my analysis or not, the RFID tag is entering our lives in various forms and basically will track everything you buy at some point in the future.
Medical Uses of Silver
The amount of silver used in medical applications continues to grow year over year. Silver has made huge inroads into the major category of wound care, because silver-based cleaners and bandages are being increasingly used throughout the world.
Additionally, silver is used in catheters, pacemakers, valves, feeding tubes, almost any medical "appliance" that is put into the body. Even surgical clothing is using silver in some applications.
As I reported years ago, even the air ducting in most hospitals now uses silver to eliminate Legionnaires Disease. The estimate here is for silver's use to increase by 100 million ounces by 2020. This will be a slow buildup and it seems a bit on the high side to me, but the incremental amounts forecast through 2015 seem reasonable with the current trend, so we can re-examine this whole study in a couple of years and see how silver demand is actually doing when compared to this report.
Any of our readers who are athletes are most likely familiar with the fact that silver has made it into athletic wear. This is primarily in brand names with high price tags but it goes way beyond the sports classification. Some areas of silver use include boots, insoles, backpacks, socks, and clothes that respond to the outside air temperature.
use a brand of underwear that is good for long trips because of the
biocide properties of silver. Any of the real students of silver
know the Sari in India uses silver and sometimes gold thread as an
adornment and, yes, some clothes in Europe and the U.S. do the same
thing, but this application is very rare. What we want to point out
is that the thermal capability and/or bio features of silver make it
perfect for the commercial textile industry in the years ahead. Slow
to start, the forecast is to use 30 million ounces by 2020, but this
is a very gradual buildup during the 2010 to 2015 timeframe.
Certainly we all know nothing is as basic to our existence as food and water, yet silver has a significant role in both and it is projected to grow rather dramatically over the next decade.
The FDA has approved adding silver to bottled water to help kill bacteria. This is something the mainstream press seems to have missed - how odd! Although microscopic in nature, the important point is government approval because this opens the door for major municipalities to use silver for water purification, which of course is being done on a consumer level, but just beginning at the local community, city, and state level.
Food processing has used silver-tipped cutting instruments for meat processing, for example, but expand this one example to milk and cheese manufacturing, nut butters, the baking industry, and I think you see my point. The official outlook is for food hygiene and water purification applications to reach 90 million ounces per year by 2020.
There are many other uses and certainly our members will probably contact us regarding them. There are two main categories that will be addressed here that will not be taken into account yet may have a measurable impact on silver use.
The first is the wood preservative issue. This is something that this writer has addressed in the past, and, according to the Silver Institute, the amount of silver that potentially could be used to replace Chromate Copper Arsenate (CCA) per the mandate of the U.S. Environmental Protection Agency could reach up to 50 million ounces per year (2005 reporting period). I know one of the major researchers in this field, and the amount of silver for these types of applications is down significantly to about 1/5 the level reported five years ago. Perhaps 10 million ounces of silver use on an annual basis.
Since the approval cycle seems to continue to drag on, we are not considering this in our analysis, but it could have some impact. Due to the fact that the projected numbers to food/water and medical are so high, this writer sees the wood preservative as a buffer to the other numbers. In other words, it gives us a margin of safety in our analysis.
Another application that at one time seemed very significant is the superconductivity story. Those who wish can go back into some of the articles written by your publisher many years ago addressing this market. This area of silver use does exist and it is primarily around large motors in military and industrial applications. The use in electrical wiring continues to decline and is a tightly held secret. Therefore, if you read my earlier work in this area, please note that things do change and the projections that I gave at the time were the best estimate of silver use when written, but as of this report they are much higher than what can be achieved today.
Furthermore, there have been rumors that superconductivity can be achieved in "wiring" without the use of silver - personally this is doubtful to my thinking, but it cannot be ruled out entirely. One of the most closely held secrets is how much silver is used in any superconducting application. Whether power manufacture or distribution, in either case we are going to ignore this potential use. Additionally, the Maglev train is reported to use some silver in the rail system . . . but again, getting numbers here is impossible.
Finally, in this section one rather large use that is seldom if ever written about is the military application of silver. Charles Savoie, who has contributed to the Web site basically from the inception, had written in this area and none of us have been able to get any kind of information about the amount of silver used for the military. The assumption (and most likely valid) is that the number is buried within the general industrial applications already outlined above.
Remember, however, that at one time silver was held as a "strategic stockpile" for military applications. Once everyone bought into the just-in-time-inventory method of doing business, Congress decided to use the silver in the Silver Eagle coinage program, which ate up the entire supply a few years ago, and now silver must be purchased off the open market to keep the coin program continuing.
Industrial Application Summary
The future for silver looks bright indeed from an industrial application perspective. Many of the well established industrial uses will continue, and many areas, like solar, water purification, and medical use, will continue to grow at significant rates. In fact the computation is for the industrial side to have a compound growth rate of about 14% - very significant.
Recycling - the Wild Card?
As readers of The Morgan Report, you know that the photography issue is really a moot point because, for all practical purposes, all the silver halide processing comes back into the marketplace due to recycling. However, this part of the recycling process has declined measurably the last several years as digital photography has increased dramatically.
However, silver is not to be wasted, and any time that silver can be recycled efficiently it will be done. As stated earlier in this report, sometimes silver is recycled even though the economics do not make sense. A great deal of the photo recycling that continues is from X-ray film, and this will draw to a close at some point, most likely during the timeframe we are addressing.
We all would like a number, and according to both the Silver Institute and CPM Group, the amount of silver recycling on a annual basis is around the 250-million-ounces-per-year level. Jessica Cross states she "reckons" it to be closer to 400 million ounces. Thus you can see my dilemma as to getting a clear idea of the true numbers. It is safe to state that there will be more recycling of silver in the future but how much is extremely difficult to project. For now I am going to use the numbers of the best recognized studies, and figure 250 million ounces on an annual basis and growing.
Many of the high-growth applications can be recycled, such as solar, solar batteries, some consumer electronics. But RFID tags and most medical applications will not be recycled, therefore it may be safe to assume a constant rate of turnover at some point, perhaps 2015, where the total amount of silver recycling is 300 to 350 million ounces per year. This number seems high to me, but it does include coin melt (give me a break, who is melting silver coins now?), silver jewelry recycling, photo waste, and electronic waste.
Investment Demand, the Real Story
It is my much studied opinion that the real story and the most misrepresented on the silver market is the true investment demand for silver.
The pie chart to the right is typical of all in the industry showing coin demand as perhaps 7% of the total demand. At least this independent look does show investment demand apart from coin demand. As long we have been studying the silver market it might be interesting to note that in the early 2000s, the words "coin demand" did not exist; the word "other" was used and it was shown as 6% of the total market.
If you are a new subscriber, you may have downloaded our special report "Silver Fundamentals, Fundamentally Flawed," which was a portion of one of the Morgan Reports pointing out what we are going to emphasize now. The amount of investment demand for silver is considerably more than reported by any of the official studies.
First let's clarify the coin market report; taken as about 7% of the market we can determine that approximately 30-40 million ounces of silver is taken out of the market as official coins, such as the Silver Eagle, Silver Maple, Silver Philharmonic, and all no name (private mint) silver rounds (silver one-ounce medallions - serving as "coins" without a government mint marking).
number is accurate but the number that always seems to be missing
(in the above chart, it is included) is the investment demand for
commercial silver bars - the type of silver used in industry but held
for investment purposes.
Take a look at this chart:
We can clearly determine that from the middle of 2006 when the ETF (namely, the SLV) began, we started with about 130 million ounces of silver in commercial bar form. But notice since that timeframe other ETFs have begun, and existing bullion investment companies such as Central Fund of Canada have continued to increase their holdings of silver.
If you study this carefully, you will be able to account for ALL the reported aboveground silver in commercial form. Remember, these are approximations, and no one knows the precise amount, but both of the most respected studies on silver tell us that 600 to 700 million ounces of silver exist in thousand-ounce bar form. All of the silver shown in this graph is for investment purposes, with the exception of the Comex.
For the Comex, only about half of the holdings (~118 million ounces) is held for investment purposes. The other half, or 60 million ounces, is dealer inventory that is held against multiple short positions.
Notice that we have increased from the middle of 2006 at about 250 million ounces, to 600 million ounces at the end of 2009. This is an internal compounded rate of 18%. And 475 to 600 million a year later, meaning perhaps 125 million ounces of silver, were taken up as investment demand between the beginning of 2009 and the start of 2010. This is something you will not find in the mainstream press or any of the most recognized studies in silver. Yes, you may see a vague mention of it in some obscure way, but no one is going to be pounding the point home that maybe there is a "float" of 60 million ounces of commercial grade silver available in the entire world and that silver has multiple claims against it!
We can basically state that investment demand for silver in commercial form has been increasing at about 100 million ounces per year for the past three years. However, if you squint and study this chart carefully, you can see that things have been leveling off the past few months. There is nothing certain in the investment world, but everyone at this point should be asking the question, "What happens if the investment demand for silver in 2010 is 100 million ounces of physical and there is a float of only 60 million ounces available?" Would any of you want to be short the silver market at this point?
It would take roughly a billion dollars at today's silver price to corner that last remaining 60 million ounces of silver. Is someone thinking about this?
Silver Production Increases
Just want to touch on this point one more time before making some conclusions. We have made an assumption that silver production will increase every year over the next decade at about 2% compounded per year. If we stop to think about this, we are projecting that we can add 13 million ounces per year at a minimum. This is doubtful in reality, since most of the major silver producers - Pan American, Silver Wheaton, Silvercorp, and several of the juniors - are not yet at full production but are much closer to full production than a big ramp up going forward. However, there are many more variables than just primary silver miners. We discussed the gold miners and briefly outlined the base metal miners. Suffice it to state our 2% approximation is sufficient to make some sound projections.
The silver market is poised for significant pressure to the upside over the next decade. The amount of increase in investment demand is the primary driver, as this writer has stated from the beginning of this bull market. Additionally, the rate of increase of industrial use is much greater than the rate of increase of silver production. However, the total amount of silver produced by 2020 could be near the 800-million-ounce mark, an increase of 150-200 million ounces. The amount of increase in industrial demand will be conservatively 250 million ounces by 2020.
Recycling is a factor that cannot be overlooked and it is most likely set to increase over the coming decade, but the question remains whether the amount of recycled silver will fill the gap, and it seems very unlikely to do so.
It is difficult to forecast when the tipping point will come, when investment demand and industrial demand combine at some level to put great pressure on the silver price. Certainly, to be fair, we must acknowledge the fact that the SLV does hold a great deal of physical silver and this could be mobilized to reduce the price by the "market makers" deciding to dump silver for no apparent reason. I write this just to maintain that this has been considered, but from a practical viewpoint it does not seem likely, as there are many areas within the SLV that cause concern. However, when it comes to the silver market, we must think of even the remote possibilities.
The bottom line is that the physical silver supply is very tight at this moment in time and the market is poised to move up on any substantial buying pressure. The U.S. Commodity Futures Trading Commission (CFTC) said it will hold a public meeting on March 25 to examine whether position limits are needed for gold, silver, and copper futures markets.
According to the press release, the meeting will look at "the application of speculative position limits to address the burdens of excessive speculation in the precious and base metals markets; how such limits should be structured; how such limits should be set; the aggregation of positions across different markets; and the types of exemptions, if any, that should be permitted," the CFTC said in its official notice.
David Morgan is recognized around the globe as an expert on silver, gold, and natural resources. Since 2000 his subscribers to The Morgan Report have profited from his diligent work and expertise. Do you really need help in this sector? - Thousands of subscribers get help every month with The Morgan Report.