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Silver is a precious metal that is used in many different areas such as jewelry, photography, and a wide array of industrial applications. In fact, industrial applications (for example computers, cell phones, TV, batteries, pharmaceuticals) made up about 54% of the world’s silver fabrication demand in 2007. As a whole, demand for silver has been growing faster than annual production since 1990,and silver inventory has dropped 98% from 1942 to 2004, 5.9 billion oz to 115 million oz, respectively. Silver is even more scarce than gold as the above ground supply of silver was about 5x less than that of gold in 2006. The effect of the falling supply of silver coupled with increasing demand from the US economic slowdown has lifted silver prices to their highest point since 1981 (2007 average silver price = $13.38 /oz).
Siler futures with a December, 2008 delivery date. US$/Troy oz.
Many of the ETFs buy actual silver reserves as backing to the fund. As a result, ETFs make up about 50% of the world's silver market.
In 1980 the price of silver climbed to $50/oz from only $5/oz two years earlier. The reason for this was a massive discrepancy between supply and demand. Previous to 1980 the US government tried to keep silver prices low by periodically loaning out silver from the 2 billion ounce silver inventory that it kept in the U.S. Strategic Stockpile. They loaned out the silver in return for silver certificates, essentially an IOU. By the time the contracts were up, there was a demand of 4 billion ounces of silver, but in reality, there was only 2 billion ounces of silver in the market. As a result prices skyrocketed to make up for the gap between supply and demand.
Today, the majority of silver demand is from industrial applications. Industrial application demand has risen every year since 2001 and now makes up 54% of silver demand with 455.3M ounces. At the same time, above ground supply of silver decreased 8% and government sales (more government sales means more supply) decreased 46% in 2007, primarily because China and India did not sell much silver that year. In addition, silver mining is struggling to find new silver sites and keep up with demand (silver mining grew 4% in 2007).