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Michael Luddy

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.^[1] As a whole, demand for silver has been growing faster than annual production since 1990,^[2]and silver inventory has dropped 98% from 1942 to 2004, 5.9 billion oz to 115 million oz, respectively.^[3] Silver is even more scarce than gold as the above ground supply of silver was about 5x less than that of gold in 2006.^[4] 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).

Companies/Funds Helped by Rising Silver Prices

Silver Mining Companies

• Pan American Silver (PAAS): Pan American is the world's largest primary silver miner with silver production of 17.33M oz in 2007. Just over half of their silver comes from metal byproduct production.

• SILVER WHEATON CORP (SLW): Silver Wheaton has long term contracts with 5 different silver mining companies which allows Silver Wheaton to buy silver from these mines at an almost fixed purchase price of around $3.90/oz. As a result, Silver Wheaton gets all of their revenues by then selling this silver in the market.

• Silver Standard Resources (SSRI): Silver Standard acquires and develops mining properties. The company owns or has large stakes in several mines but does not directly mine silver themselves. Silver Standard has 1.5 billion oz of silver from the these mines. Silver Standard could potentially be a silver miner as the company plans to start mining in Argentina in 2009. Silver Standard estimates that the Pirquitas mine in Argentina will produce 10M oz of silver per year.

• Bear Creek Mining Corporation (BCM): Bear Creek has 70% stake in one of the largest silver deposits in the world.

Other Silver Mining Companies

• Coeur d'Alene Mines (CDE)

• Barrick Gold (ABX)

• Hecla Mining Company (HL)

• Meridian Gold (MDG)

• Apex Silver Mines (SIL)

• ECU Silver Mining (ECU.V)

• Endeavour Silver (EDR.TO)

• Excellon Resources (EXN.V)

• Fortuna Silver Mines (FVI.V)

• Great Panther Resources (GPR.TO)

• Hochschild Mining (HOC.L)

• Impact Silver (IPT.V)

• Minera Andes (MAI.TO)

• Milner Consolidated Silver Mines (MCA.V)

• Silverstone Ressources (SST.V)

• Silvercorp (SVM.TO)

Silver Exchange Traded Funds (ETFs)

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.^[5]

• iShares Silver Trust (SLV): This is an ETF that has silver reserves of over 180M oz.

• Central Fund of Canada (CEF): This ETF has about 45% of its reserves in silver while the remaining 55% is in gold.

• ETFS Silver (SLVR): This ETF tracks the DJ-AIG Silver Sub Index.

• ETFS Physical Silver (PHAG): This ETF is backed by silver bullion.

Companies Hurt by Rising Silver Prices

• Signet Group (SIG): Signet is an affordable jewelry company. The company is more vulnerable than its high end competitors to rising silver prices because Signet is less able to raise its prices due its lower end client base.

• Tiffany (TIF): About 30% of Tiffany's revenue comes from non-gemstone silver jewelry.

• Eastman Kodak Company (EK): Kodak increased prices 20% in May 2008 largely due to rising silver prices.^[6] Silver nitrates and halides react with light and are used in photographic film.

• FUJIFILM Holdings (FUJI): Fuji increased prices 20% in May 2008 largely due to rising silver prices.^[7] Silver nitrates and halides react with light and are used in photographic film.

Silver Supply and Demand

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.^[8]

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).^[9]

^[10]

Factors that Influence Silver Prices

^[11]

• The Effect of Silver Stockpiling: Silver is one the best conductors of energy which makes it an important component in most electrical devices. It is also a very good reflector of light making it valuable to producers of mirrors, windows, and other glass products. When silver prices rise, large companies that are dependent on the metal tend to horde it.^[12] This can further drive up demand, as was the case with palladium. In 2000, the Russian supply of palladium was disrupted causing prices to rise. In response, companies who used palladium in their products began to stockpile the metal.^[13] This drove prices up to $1,100/oz from $330/oz previously.^[14]

• Silver is a Byproduct Metal: About 80% of mined silver is gathered as a byproduct of other metals, such as copper, nickel, zinc, and lead.^[15] . Most of this metal comes from mines outside of the U.S. When the dollar falls against other currencies, the cost for importing these metals rise and demand falls, driving down silver production..

• Shorting Silver: On the Commodity Exchange (COMEX), the silver short position is very large. In fact, silver is the world's only commodity that has a short position which is larger than both its global production and inventories.^[16] The extent of this position has been created by naked short selling, which means shares are sold without an arrangement or promise of a borrower. This large short position helps to keep silver prices lower than they may be otherwise.

• Countries Buying and Selling Silver: When countries sell their reserves of silver in the market they increase the supply of silver available. However, in 2007, sales from countries dropped 46% because China and India did not sell as much silver as they did in the past.

• Mine Production: Although the majority of silver is produced as a byproduct of other metals, 20% comes from actual silver deposits. Mine production grew only 4% in 2007 to 670.6M oz and additional silver deposits are becoming increasingly difficult to find. ^[17]

^[18]

References

1. ↑ Silver Supply Index
2. ↑ Silver Prices
3. ↑ The Case for Silver
4. ↑ Silver is More Valuable than Gold
5. ↑ Commodities Corner Silvers More Sparkle
6. ↑ Kodak raising prices
7. ↑ Fujifilm forced to raise prices
8. ↑ The Price of Silver in 1980
9. ↑ Silver Supply Index
10. ↑ Silver Supply Index
11. ↑ Silver Supply Index
12. ↑ Why Silver is More Valuable than Gold
13. ↑ Wikipedia:Palladium
14. ↑ Palladium Spot Price
15. ↑ Commodities Corner Silvers More Sparkle
16. ↑ Why Silver is More Valuable than Gold
17. ↑ Silver Supply Index
18. ↑ Silver Supply Index