The Histoy of Silver from 1960 to 1999
1950
to 1960
(average prices based on London PM Fix)
From
the end of World War II until the early 1960s, fabrication demand for silver
rose strongly. This period witnessed the rebuilding of Europe and Japan, and
a tremendous push worldwide toward electrification, housing construction, and
consumer durables. Many electrical appliances, as well as electrical generation
and transmission systems, use silver, which was one of the major factors behind
this extended boom in industrial silver usage. At least as important was the
advent of mass market photographic products, which sharply increased the use
of silver in photographic films and papers.
There was another
reason why fabricators were eagerly turning to silver during this period. The
U.S. Treasury had a silver inventory that, as of 1950, stood at 2 billion ounces.
Furthermore, Treasury policy was to buy domestically mined silver at 90.5 cents
per ounce and sell silver at 91 cents, effectively putting a cap on the United
States market price of silver.
In this way, the U.S. Treasury was the buyer or seller of last resort in the
silver market, by virtue of the Silver Purchase Act of 1934 (itself one of a
series of such laws extending back to the 1870s). The 1934 law authorized the
Treasury to buy silver either until:
• the market
price reached $1.29 (the monetary value of silver) or
• the monetary value of Treasury silver stocks reached one-third of the
monetary value of the Treasury’s gold stocks.
This purchase program
remained in effect, in essence, until 1961. During the intervening 28 years,
the Treasury acquired 3.2 billion ounces of silver. About half was acquired
in the first four years, from 1934 through 1937, and the other half between
1937 and 1955.
A good portion
of this silver was acquired from U.S. mines: 880 million ounces, or nearly all
domestic production from 1937 to 1955. About 110 million ounces were purchased
during the first three months following passage of this legislation in 1934.
The law prohibited Americans from owning non-monetary silver, and directed them
to sell it to the Treasury. A great deal of silver was also imported. Between
1934 and 1939, nearly 2 billion ounces of silver came from other countries.
Market prices ranged between 25 cents and the ceiling created by the Treasury’s
set price of 90.5 cents during these years, but spent most of the time below
75 cents. U.S. fabrication demand (excluding coinage), which totaled 1.8 billion
ounces from 1935 through 1955, was met by imported silver.
By 1955, the demand
for silver was great enough to push market prices above the Treasury’s
90.5 cents purchase price. Since the Treasury was a seller at 91 cents, the
price remained around this level for several more years, as the Treasury’s
reserves were depleted. While the 1934 law directed the Treasury to buy silver
with an eye on boosting the silver price to $1.29, the Treasury’s policy
during the late 1950s was designed to keep silver prices below the point at
which coins would be melted down, to allow time for the Treasury to extricate
itself from the silver market.
Treasury reserves
peaked in 1959, when the U.S. Treasury had 2,060,000,000 ounces on hand, and
another 1,331,000,000 ounces were outside the Treasury in circulating coinage,
for a total of 3,391,000,000 ounces.
In summary, the
post-war period saw silver demand rise sharply, while mine production and other
supplies were relatively stable. The U.S. Treasury sold tremendous amounts of
stockpiled silver during the years after 1955, in order to keep the price of
silver below its "monetary value." Additionally, the actual growth
of the overall economy increased the need for circulating coinage. One reason
for the Treasury’s sales was straightforward: if silver’s market value
rose above its monetary value, $1.29 per ounce, holders of U.S. silver certificates,
one form of currency in circulation at the time, could trade in these $1, $5,
and $10 bills in exchange for silver bullion. Also, there would be an enormous
incentive for individuals to melt down the silver coins in circulation.
Had the Treasury not been present as a seller of silver, market supplies from other sources would have been hard pressed to keep pace with the growth of fabrication demand, and the price of silver most likely would have risen sharply during the late 1950s and early 1960s.
1960
to 1965
(average prices based on London PM Fix)
For
decades, the Treasury had been a net buyer of silver. By 1960, it had become
a net seller. In 1960, the Treasury sold 22 million ounces of silver in bullion
form, and used another 46 million ounces in coinage. The next year the Treasury
had to sell 63 million ounces of bullion and use another 56 million ounces to
replace silver coins that had been taken out of circulation by investors. That
year, 1961, the Treasury realized that it would run out of silver for use in
coinage and as a reserve against silver certificates unless it took drastic
measures to begin phasing silver out of currency. In 1961, the Treasury ordered
$5 and $10 silver certificates out of circulation, freeing silver reserves held
against these bills and reducing the public’s call on Treasury silver.
In November 1961 the government also suspended silver bullion sales by the Treasury
at the formerly fixed price of 91 cents.
Once the Treasury
stopped selling at that price, market quotes for silver quickly rose. In June
1963 the Treasury also replaced the $1 silver certificate with Federal Reserve
notes. By 1963, silver prices reached $1.29, the monetary value of silver in
coinage. At prices above this level, holders of silver certificates would have
been able to redeem them for more valuable silver, under the now-defunct silver
certificate legislation. (The other trigger price the Treasury worried about
was $1.38, at which level it was profitable to recycle coinage for its silver
content.)
During this transition
period, the U.S. Treasury still had to keep the silver market well supplied,
in order to keep the silver market relatively calm until it had completed the
withdrawal of silver form its currency. In late 1963 the Treasury resumed its
silver bullion sales, as part of this effort. Over the six years between 1960
and 1965, the Treasury sold a total of 342 million ounces of silver bullion.
It used another 814 million ounces of silver in coinage during this same time.
In total, the Treasury used 1,156,000,000 ounces of its silver reserves. Much
of this silver, especially the bulk of it used in coins, found its way quickly
into the hands of investors. Government steps to remove silver from the currency
led investors to conclude that the price of silver would rise sharply once the
Treasury no longer was supplying the market with such large volumes of the metal.
Fabrication demand
continued to rise sharply. Industrial use, excluding coinage, rose at a 9 percent
per annum pace, from 212.9 million ounces in 1959 to 355.8 million ounces in
1965. Including coinage, which grew rapidly during this same time due to the
investor run on coins, total fabrication demand rose 16% per annum. Mine production,
in contrast rose only 1.9% per year from 195.6 million ounces in 1959 to 218.4
million ounces in 1965.
Secondary recovery of silver was starting to expand, in part spurred by the realization that with the passing of Treasury silver sales and coinage programs the market would need to recover increasing amounts of silver from scrapped items. It was clear to market participants that silver prices had been restrained by the Treasury’s willingness to fill the gap between market supplies and industrial demand, and that once the Treasury’s silver was gone, additional supplies would have to be found elsewhere. Coin melt rose from 10 million ounces in 1960 to 30 million ounces in 1965. Silver recycling from other items rose from 40 million ounces in 1960 to 57 million ounces in 1965.
1966
to 1970
(average prices based on London PM Fix)
By
1966 the Treasury’s program of eliminating silver from coinage was in place.
The Treasury continued to use some silver in coins from then until 1969, but
the annual average during these four years was 38.5 million ounces, down from
178 million ounces per year on average during the previous four years. Austria,
France, and West Germany continued to use silver in some circulating coins until
the late 1970s.
The U.S. government
also continued to sell silver bullion. From 1966 through November 1970, 674
million ounces of bullion were sold. (In 1967 the bullion sales program was
transferred from the Treasury to the General Services Administration. Ownership
of the bulk of the remaining silver were transferred from the Treasury stocks
to the National Defense Stockpile.)
Industrial demand
meanwhile remained strong, although there was a period of weakness in the mid-1960s.
The higher silver prices had some limiting effect on use, although the major
factor was slowing overall economic growth and a shift in the economy away from
the manufacture of goods that used silver. Industrial use peaked in 1966 at
414.9 million ounces. It declined 10 percent over the next two years, before
stabilizing between 372 and 387 million ounces on an annual basis in the late
1960s and early 1970s.
Investors remained keenly interested in silver, absorbing around 620.5 million
ounces of silver from 1964 through 1970. Interestingly, the price of silver
rose from $1.29 to a peak of $2.57 in 1968, before falling back. The rise and
fall in silver prices was coincidental with the volume of these investor purchases:
As investor demand decreased over the next three years, prices softened commensurately.
The weighted average
price paid in these investor acquisitions, using annual average prices, was
$1.88 per ounce. This figure will be important in understanding the next phase
of the silver market, from 1971 into 1979, when the new supply of silver fell
short of industrial requirements and the resulting deficit was accommodated
by investor selling.
While investor demand was strong and industrial demand remained at healthy levels, Mine production rose at a 3.4 percent per annum rate, from 218.4 million ounces in 1965 to 258.5 million ounces in 1970. (Actually, mine output of silver was not as vibrant as these figures suggest, since 1965 was a year of stable output and 1970 represented a cyclical peak in silver production. Output fell back the following year, and did not regain its 1970 level until 1977.) Secondary supply also continued to expand, in part due to the rise in silver prices, which made recycling much more attractive. Bloated by continued U.S. government sales, total supply remained high throughout this period.
1971
to 1978
(average prices based on London PM Fix)
By
1971 U.S. government stocks had fallen from their 1959 peak of 2.1 billion ounces
to around 170 million ounces. The U.S. government had removed silver entirely
from its currency, and ceased to intervene in the silver market. Total silver
supplies had reached a record 747.4 million ounces in 1965, of which 54 percent,
or 400 million ounces, came from the U.S. Treasury. From that point onward,
the Treasury was backing out of the silver market, and total supply declined
steadily, and never has approached that 1965 record again.
Total silver supplies
had declined to 381.3 million ounces by 1971, their lowest level since 1960.
New mine production accounted for 65 percent of this total, or 247.3 million
ounces. Secondary and other supplies totaled 134.0 million ounces. Throughout
the 1970s, mine production remained rather static, fluctuating between 236.6
million ounces in 1974 and 272.0 million ounces in 1979. Secondary supply rose
from 1972 to 1974, in line with silver prices, and then fell back to 152.0 million
ounces in 1978.
Fabricating demand
rose sharply in the early 1970s, from 414.4 million ounces in 1971 to 545.0
million ounces in 1973. Demand then dropped for two years, as a worldwide recession
reduced consumer demand for silver-using end products and as higher silver prices
led to some reductions in silver use. Demand fell to 497.9 million ounces in
1974 and 437.9 million ounces in 1975. Use rebounded the next year, to 511.0
million ounces, before stabilizing between 488.6 million ounces and 491.3 million
ounces in 1977 and 1978.
Total new silver supplies fell far short of meeting these requirements. From 1971 through 1978 there was a cumulative deficit of new supply over demand of 415.8 million ounces. The silver that filled this gap came from the 620.5 million ounces of silver inventories – many held by investors – built up during the previous seven years. By becoming net sellers of silver, investors replaced the U.S. Treasury as the source of silver to make up for a major, ongoing shortage of silver.
The difference was that in the early 1960s the U.S. Treasury had sold at a fixed price because it was acting to restrain silver prices. In contrast, investors wanted increasingly higher prices for this service. The weighted average price of the investor silver sales from 1971 through 1978 was $3.21, 71 percent higher than the price they had paid for this metal in the late 1960s. The average price of silver was $1.55 in 1971. The average price rose to $4.71 in 1974, and then spent the next four years between $4.35 and $5.40.
1979
to 1980
(average prices based on London PM Fix)
By
1979, investors and other market participants had come to the strong conviction
that the silver market was facing a severe shortage of metal, and that prices
were likely to rise sharply at some point. The market had been living off of
investor selling for seven years. Prices had risen from the beginning of the
decade, but there were serious questions as to how much longer investors would
be willing and able to continue supplying silver to fabricators, at least at
the prices seen in the mid-1970s.
World economic
and political events also were coming to bear on the silver market, most notably
in the form of a major cyclical upward surge in inflation throughout the industrialized
world. Sensing that silver prices should be adjusting upward to compensate for
these inflationary trends, many investors decided that silver prices between
$4.00 and $5.50, which had prevailed during most of the late 1970s, were too
low. Investors ceased selling their old silver holdings, and instead began adding
to their holdings. This added further upward pressure to the price of silver.
Simplistic retrospectives of the silver market in late 1979 tend to focus on
the high-profile purchases of large amounts of silver and silver futures by
various wealthy individuals; in reality, there was a tremendously broad-based
rush to buy silver by investors worldwide at the time.
By the final quarter of 1979, silver prices had risen to levels between $15.00
and $25.00 per ounce. At these levels several physical market forces combined
to act against higher prices. Additionally, the two major U.S. futures exchanges
that traded silver at the time took steps to force those with margined long
positions to liquidate their positions.
As silver prices
rose above $15.00 in September 1979, fabrication demand began to be affected.
On an annual average basis, industrial silver use fell a relatively mild 0.9
percent to 445.1 million ounces in 1979. Demand had held up reasonably well
during the first three quarters of the year. However, a sharp cut-back in demand
in the fourth quarter led to overall annual decreases in silver use. By some
estimates, industrial use of silver was 40 percent lower in the last quarter
of 1979 than it had been in the first quarter of that year.
When silver prices
rose sharply in 1973-1974, manufacturers began searching for ways to reduce
their need to use silver. Several substitutes for silver and methods to reduce
per-unit silver use were developed, but they were too expensive to implement
as long as silver was around $5.00 per ounce. When silver rose to $15.00 and
more however, fabricators were able to introduce these measures rapidly. Demand
also quickly declined for jewelry and sterlingware.
Investors began to sell large amounts of silver especially old coins from the
1960s. Other sold large amounts of sterlingware and jewelry for its silver content.
A host of political
events, including the continuous U.S. hostage crisis in Iran and the Soviet
invasion of Afghanistan, motivated investment demand, helping keep silver prices
high and volatile through 1980. High inflation, high nominal interest rates,
and negative real interest rates further stimulated investor interest in silver
and other tangible assets. Prices dropped as low as $10.80 in March, but rose
back to $25.00 in September, as the Iran-Iraq war erupted. By the end of 1980
silver prices had subsided once more to around $16.00.
These high silver
prices meanwhile were having a dramatic effect on the physical silver market
conditions. Total supply rose form 434.8 million ounces in 1978 to 505.0 million
ounces in 1979, and then to 584.6 million ounces in 1980. The bulk of this increase
occurred in secondary recovery. Total secondary recycling of silver doubled,
from 152.0 million ounces in 1978 to 302.0 million ounces in 1980. The recovery
of silver from old coins, those holdings taken in by investors during the 1960s,
increased from 21 million ounces in 1978 to 45 million ounces the next year,
and then to 94 million ounces in 1980. Refiners faced substantial backlogs,
sometimes of 6-12 months in processing these materials.
Mine production
remained almost unchanged during this time, and actually was lower in 1980,
at 264.6 million ounces, than it had been in 1978. (A U.S. copper industry strike,
along with a strike at a major U.S. silver mine, were major factors behind the
low output.) Mine developments have long lead times, and the increases in output
that came about in response to the 1979-1980 jump in silver prices did not appear
until the mid-1980s.
Prices also were
having a dramatic effect on fabrication demand, compounded in 1980 by the onset
of the deepest post-war recession. Industrial silver use fell from 449.1 million
ounces in 1978 to 362.5 million ounces in 1980, a level fully 25 percent below
the 1976 cyclical peak of 481.0 million ounces. The last countries using silver
in circulating coinage, Austria, France and West Germany, withdrew from that
activity, reducing silver use in coinage on a worldwide basis from 39.5 million
ounces in 1978 to 15.0 million ounces in 1980.
The combination
of higher secondary recovery and lower fabrication demand brought an abrupt
end to the eight years of silver market supply deficits. In 1978 new supply
had fallen 53.8 million ounces short of fabrication requirements. In 1979 there
was a 28.9 million ounce surplus.
In 1980 this surplus reached 207.1 million ounces, nearly as high as the 228.9 million ounce surplus that had resulted from the 1968 run-up in silver prices and the Treasury’s sales programs. The increase in the recovery of silver from old coins accounted for nearly half of the surplus.
1981
to 1990
(average prices based on London PM Fix)
By
the beginning of 1981 the silver market was starting to adjust after the traumatic
events of 1980. Industrial silver demand was declining, both because of the
worldwide recession that had set in, and in reaction to high silver prices.
Investment demand for silver also fell sharply. Investors were aware of the
reduced fabrication demand for silver, and of the amount of silver backed up
at refineries Other investors had lost money in 1979-1980, and were wary of
returning to the market. Still others were distracted from silver by more attractive
financial markets.
Supply also fell,
as the surge of old scrap and coin melt subsided. Total supply dropped 101.1
million ounces from 1980's level to 483.5 million ounces.
The worldwide recession
persisted until late 1982, continuing to restrain fabrication demand and discourage
investment absorption. Silver mine production, meanwhile, had begun to rise,
as some mines developed in reaction to the higher prices since 1979 came onstream.
Much mine output of silver remained profitable even as silver prices subsided
to around $8.00 in the early 1980s, so that expanding existing operations and
developing new mines remained an attractive proposition for many miners. Secondary
recovery of silver, meanwhile, continued to decline.
Silver prices reached
a cyclical nadir of $4.98 in June 1982, 10% of the $48 peak just 30 months earlier.
June 1982 also proved to be the trough of the recession in the United States.
During 1982 serious problems erupted in the international debt market, in particular
relating to the debt repayment problems of certain countries in Eastern Europe
and Latin America.
In late 1982 investor
interest in silver was rekindled by several forces, all of which emerged at
roughly the same time. The international financial market panic led some investors
to turn to silver. Others were attracted by what they saw as unsustainably low
prices. Investment demand also was encouraged by a rapid easing of credit market
conditions by monetary authorities in most industrialized nations; this easing
led to an immediate revival of inflation fears. As a result of all of these
forces coming to bear at once, investment demand picked up during the second
half of 1982 and the first quarter of 1983. This influx of investor buying helped
take silver prices from the June 1982 low of $4.98 to a peak of $14.72 in March
1983.
In March 1983,
several trends came into play reversing the rise in silver prices. First, the
price had nearly tripled in nine months. Such a fast ascent led to profit-taking
by investors; it also constricted industrial use. On the supply side, secondary
recovery of silver from scrap and coinage increased in response to the higher
prices. OPEC lowered its official benchmark oil price, for the first time in
the cartel's history. The sudden decline in petroleum prices quickly reduced
inflation expectations. Silver prices had averaged $13.96 in February 1983.
In March they averaged $10.62.
Prices recovered
slightly during the summer months, but from 1983 until 1986 the trend in prices
was downward. This downward trend served an important purpose in the physical
market, in that it discouraged new developments of primary silver mines, except
where high ore grades or other factors made for extremely efficient plants.
It also served to reduce secondary recovery of silver. On the demand side of
the market, relatively low silver prices removed the incentives to using less
silver or substituting away from silver in products.
Total fabrication
demand fell sharply at the beginning of the 1980s, in response to higher silver
prices, and worldwide recession. Longer term demographic and technological trends
had been pointing to a decline in use, which the price rise and recession accelerated.
For example, silver
use in sterlingware in the United States actually had peaked in the early 1970s,
and was clearly going through a secular loss of markets due to changing demographics
and consumer tastes. By 1979 U.S. sterlingware use of silver had fallen 55%
from its 1973 peak of 29.3 million ounces. The decline that followed 1979 was
a continuation of this longer term trend, exacerbated by the rise in silver
prices and the economic recession.
Other industries,
including the important photographic and electronics uses for silver, were able
to reduce their per-unit silver requirements in some instances, and in other
cases to substitute other materials for silver. As silver prices subsided later
in the 1980s, some of these trends reversed. In the color film photographic
market, for example, competition for higher film speeds led to an increase in
per-unit silver use, to levels higher than those seen in the late 1970s.
Fabrication demand, including coinage, reached a low of 363.1 million ounces
in 1981, the lowest level since 1960. During the early 1980s, fabrication demand
remained weak, but in 1984 it began rising once more, stimulated by low silver
prices and strong growth in industrial activity.
Silver supply followed
a more erratic pattern during the 1980s, which partly reflected the high degree
of price responsiveness of secondary recovery. Total supply fell 101.1 million
ounces from 1980 to 1981. This decline was entirely a function of the scaling
back of secondary recovery, after the rush of material in late 1979 and 1980.
Total supply continued to slump in 1982, falling to 455.1 million ounces. While
this was happening, in late 1982, silver prices staged a rally from $4.98 to
nearly $15.00. This surge in prices brought out significant quantities of scrap
in 1983, which boosted total supply to 531.1 million ounces. As prices decreased
from early 1983 into 1986, total supply once more fell back, to 449.7 million
ounces in 1986. Mine production was restricted by the low prices at this time,
with silver reaching a low for this period of $4.85 in May 1986. Secondary recovery
also was constricted by these low prices. Since 1986 total supply rose once
again, reaching 514.0 million ounces in 1990.
Since 1979 there
was a surplus of total silver supply over fabrication demand every year. On
a cumulative basis, this surplus totaled 927 million ounces from 1979 through
1990.
It appears that
most of this surplus was bought by bona fide investors, individuals who have
accumulated these silver positions in the expectation of being able to liquidate
them at some later date at a profit. Minor surpluses and deficits can be accounted
for by changes in reported market inventories and investor coin purchases. Most
of the silver coins produced in this decade were bullion coins, designed for
investors and collectors and not intended by their mints for use as circulating
currencies. Silver coinage since 1979 totaled 241.6 million ounces.
Accounting for these factors, it still seems that investors acquired around a billion ounces of silver since the late 1970s, one quarter of this in coins. The period of heaviest silver purchases occurred in 1980 and 1981. Simple logic bears this out: Strong investment demand was keeping prices high at this time. As investor buying waned later in the decade, prices slipped down. The weighted average acquisition cost of the silver added to investor inventories during this past past decade was $11.25 per ounce.
1990
to 1999
(average prices based on London PM Fix)
Throughout
the 1990's, the main question for the silver market has been the rate at which
above-ground stocks of bullion and coins are being consumed by the widening
gap between fabrication demand and conventional supply, and when this erosion
of stocks might begin to significantly impact the price of the metal.
Mine production
of new silver has risen by only 4 percent from 1990 to 1999, while total fabrication
demand increased by 22 percent during the same period.
While the fundamentals for silver strengthened during the past decade, the price
of silver has slowly climbed from an average price of $4.83 in 1990 to an average
price of $5.22 in 1999.
Last year's price
performance was subdued following an eventful 1998, and was off 5.8 percent
from the previous year, but it did finish the year up 6.7 percent from its starting
level (ending the year at $5.33 having begun it at $4.99). It traded in a narrow
range between $4.88 and $5.79.
Substantial flows
of silver out of China last year helped to keep the price in check in 1999.
Going forward, a key question for the market is whether Chinese government sales
will continue on the level seen in 1999. Given the promising prospects for strong
demand this year, the absence of such disposals on the same scale as seen in
1999, could offer strength to the silver price in 2000.
The gold/silver
ratio (the number of ounces of silver it takes to buy one ounce of gold) is
another market indicator some analysts watch. This ratio has at times been a
closely followed indicator of the relative trends in the two markets and in
the past has been used by investors as signals for buying, selling, or exchanging
gold and silver. The ratio for 1999 was 53.37, versus 53.08 in 1998. The average
for the period 1968-1999 is 50.18
To download the World Silver Survey 2000 and learn more about recent trends in the silver market, the price of silver, and supply and demand data, please click here.