Silver Prices & Industrial Demand

The impact of growing industrial demand on Silver Prices...

THE SILVER INSTITUTE in Washington just published a detailed report on The Outlook for Silver Industrial Demand, produced by the GFMS consultancy, writes Julian Phillips at GoldForecaster.

Here, I'd like to use this as a basis for examining silver supply and demand over the last three years. And we find that recent history confirms what we expect of the future for Silver Prices.

The first fact that jumps off the pages of the Silver Institute's future industrial demand report is that the future for silver looks remarkable. Industrial silver demand is forecast by GFMS to rise by one-third in the next 5 years, up from 15,160.19 tonnes in 2010 to 20,712.29 tonnes in 2015.

Much of this growth in the global total of industrial silver consumption will be driven by stronger demand for a number of established uses, including the manufacture of electrical contacts and the use of silver in the photo voltaic (solar panel) industry. New uses center on silver's antibacterial qualities, while other new uses tend to make use of its conductive properties, including solid-state lighting and Radio Frequency Identification (RFID) tags.

Overall, silver's importance in the technology of the day is huge. We'd go so far as to say that the demand from silver has transformed from a want to a need. So whether we are in a boom or bust silver's demand will remain robust. It is now needed to make all facets of an economy run well and at all levels, even down to individual needs. This secures its future and assures us that Silver Prices are well supported.

In 2010...

  • Cell phones used 404.35 tonnes of silver;
  • Computers consumed 684.29 tonnes;
  • Thick film PV consumed 1,461.90 tonnes;
  • Automobiles which used 1,119.75 tonnes;
  • Electrical and electronics demand for silver reached an all-time high of 7,555.21 tonnes;
  • Solar power demand in 2011 is expected to reach 2,177.29 tonnes, up 40% from 2010;
  • RFID tags in 2010 reached between 31 and 62 tonnes with a long way to go before reaching full market;
  • Water purification used 62 tonnes, and is set to grow to 74.65 tonnes;
  • Medical applications may grow strongly to reach 93.3 tonnes by 2015;
  • The use of nano-silver in goods packaging and hygiene combined would consume 124.4 tonnes of silver over the next five years.

While photographic use of silver allows for the re-cycling of silver, reclamation of silver from most of the above uses is difficult to nigh-on-impossible. This in itself assures either a constant or rising demand for these applications.

Of particular note is the growth in Asia where we are watching around half of the globe's population developing at infrastructural level as never before. This growth will continue at double figures, per annum for at least the next decade.

Gold Bullion is rarely consumed as it is deemed far too valuable. Reclamation efforts relative to the value of the gold ensures that scrap merchants will go to extraordinary lengths to recover the gold. In silver's case these efforts would cost more than the sale of the silver so used. As the Silver Price rises further reclamation efforts will become profitable and more silver will be recovered, but we are still a long way off from that day.

HSBC, the world's largest bullion dealer (in both gold and silver) also confirms that silver's role as a monetary metal is gathering the most momentum, particularly in emerging economies. They say that the macro economic trends from emerging markets are positive for both gold and silver. They put the growing Chinese middle classes (now well over 400 million people of the 1.3 billion Chinese citizens) as fueling an "explosive" growth in demand for silver as a hedge against fast rising inflation.

The Industrial and Commercial Bank of China, the world's largest bank by market value, agrees. ICBC sold 13 tonnes of physical silver to Chinese citizens in January alone, compared with 32.97 tonnes for the whole of 2010. So we have seen China turn from an exporter of silver to a huge importer in the last three years. And that's just the start! China was a net importer of over 3,110.42 tonnes of silver last year, whereas while it was selling 'official' holdings of silver only a few years ago it was exporting an equal amount annually.

China's ravenous new demand for silver as a store of value in inflationary times is growing exponentially. This is illustrated by the fact that silver imports last year increased four-fold over 2009.

While we don't yet have the numbers for supply of silver in 2010 we do not expect them to have risen more than 10% over 2009 levels. Once we have these we will pass the information onto readers of the GoldForecaster. But with 70% of silver mined as a by-product of base metal mining, there is a danger of demand outstripping supply.

The present sources of by-product silver are operating at peak capacity. Pure silver producers like Silver Wheaton are growing but unlikely to be able to fill the gap. Mines like Coeur d'Alene which is becoming a 50% gold and 50% silver producer do have a considerable capacity for growth and will do so. But again with demand burgeoning on both the investment and industrial sides supply will find it difficult to meet demand.

Another difficulty for Silver Bullion supply is that they are inflexible because of their dependence on mining. We do foresee rising scrap sales from the developed world where the sight of a profit on jewelry etc, can prove too tempting to the individual, but we cannot see this being more than 10 to 20% more than in 2009. In the emerging world such a concept is basically foreign to them because both silver and gold represent financial security to investors there.

If the developed world were stable and if the emerging world was used to their newfound wealth, and were their history not as close to social rupture as it has been and could be, emerging market investors would probably not trust gold and silver as much as they do now. But that is the case now. We believe (if history is to guide us) that it will take at least another generation (25 years) of wealth and stability in the emerging world for this attitude to change. Until then scrap supplies from the emerging world will remain at extremely low levels.

In 2011 we are seeing Silver Prices far above those imagined three or four years ago. But then the world is facing far more uncertainty and instability that was ever imagined then too. The decay of currencies ability to measure value has been increasing over that time too, making the soaring prices of silver and gold to become more than plausible. Indeed a strange feature of the Silver Price has been it moves with gold as though tied with a piece of elastic string to the Gold Price, rising higher and falling lower at each move. So why does it not move more like copper or another base metal used as a simple commodity? And where, if it doesn't move like them, is it headed?

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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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