Low silver price could act to restrain supply growth

It was not a banner year for silver in 1990. The price of the precious metal fell to 14-year lows late in the year on weakened investor and industrial demand. It may now be silver has nowhere to go but up after tumbling to just under US$4 per oz. in mid- December. Only 11 years ago, early in 1980, the metal was riding a crest at an all-time high of near US$50 per oz.

“In recent years, demand has risen faster than supply. Current prices are limiting total silver supplies, and are likely to restrain supply for several years,” writes The Silver Institute of Washington, D.C., in its World Silver Survey 1950-1990.

“At the same time, low real (adjusted for inflation) and relative silver prices should have a positive effect on industrial demand in the coming years.”

Investors have traditionally acquired silver, says the institute, as protection against inflation and political uncertainties, or because they think a price rise is imminent for fundamental reasons.

Investors turned away from silver in the 1980s, the institute says, “partly because of more attractive returns in financial instruments, partly due to a relatively sanguine inflation outlook and partly due to their views of silver’s fundamentals.”

For the four years ended 1989, the increase in fabrication demand for silver averaged 6.4% per year; for 1990, that increase was estimated to be 1.9%.

Total new supply in 1990 was estimated to be down slightly from the previous year. It is estimated more than 70% of the total supply is from mine production.

During the 1990s, total supply may rise by about 2% per year, with fabrication demand increasing by about 3.3% per year.

Since 1987, the institute says, the amount of new supply of silver available for investment has been in decline; in 1990, it stood at about 9 million oz.

Photography is the major application and should continue to be so; it is estimated the photographic use of silver has grown by 4.6% per year since 1985.

“This steady growth is the result of several trends, including continued expansion in the use of photographic products worldwide, and an increase in per-unit silver use in color film,” says the institute. “Competition among photo companies has led to a marked rise in film speed during the 1980s, which has been achieved without loss of image quality through the use of more silver per frame of film.”

Use of silver in jewelry and silverware is estimated to have risen by 11% per year since 1985. The electronics and electrical equipment industries are also substantial users of the metal.

The institute forecasts a rise in silver use in most major industries during the current decade.

Western world mine production of silver grew from 258.5 million oz. in 1970 to about 362.6 million oz. in 1989. (The institute records silver mine production for 58 countries, while acknowledging it has no data for small-scale silver mining activities in other nations.) Most of the world’s silver is mined in byproduct form; it is estimated as much as 68% is mined as a byproduct and/or coproduct.

The Western world’s major silver producers are Mexico, the U.S., Peru, Canada and Australia.

During the past few years, real silver prices (that is, adjusted for inflation) have tumbled to extremely low levels. The institute sees the low real price as being advantageous in the industrial market.

“The current price is low not only from a historical perspective, but also relative to other metals,” the institute says. “Gold competes with silver both as an industrial commodity and an investment. Gold now is over 70 times more expensive than silver, compared to 30-40 times more expensive in the 1970s.

“Palladium competes with silver in some electronic and catalytic applications. Palladium is more than 20 times the price of silver, up from 8-10 times more expensive than in the early 1980s. Recent efforts to minimize the use of palladium in the electronics sector are expected to continue throughout the decade.”

Silver’s low current and real prices, the institute says, should help to ensure that little substitution away from silver to other metals occurs this decade. Silver may even become a substitute for the more expensive precious metals.