Silver Fundamentals In Review: Supply and Demand

At the start of the last decade we entered a secular bear market for stocks and a secular bull market for commodities.  These secular cycles last 15 - 20 years with the previous bull market for stocks and bear market for commodities running from 1980 - 2000.  This cycle relationship ran all last century and continues today.

During a bull market you have steady growth over many years with sharp corrections along the way.  This was seen in the last bull market for stocks in 1987 when the market crashed 22% in a single day.  It was seen in silver in 2008 when prices plunged 60% in just a few months.  Silver prices just recently corrected 48% from their May 2011 highs.

Understanding that you are in a secular bull market means you should look forward to these pull backs and use them as opportunities to add to your positions when prices go on sale.  With major turmoil and liquidity constraints around the world, we may have another major buying opportunity ahead of us before we continue higher.

Before we get there it will be important to understand the fundamentals driving the bull market in silver.  Silver, unlike gold, is both an industrial and monetary investment.  An industrial investment means that it is used to produce goods such as electronics, solar panels, and biocide. The following chart shows the growth of silver demand in these three categories over the past decade:

Silver's industrial demand is combined with its monetary/investment demand to reach total demand.  The following chart shows silver's total demand and the annual production (supply).

Silver's total demand has been greater than total supply for 11 years meaning that total global silver supply is shrinking.  How much is left?  Analysts now estimate that at the current pace we will run out of above ground available silver in 9 years. 

Just like oil, there is plenty available silver in the earth's crust, but what is important is how much can come out of the ground under current production and at what cost.  It takes years to bring a silver mine into production.

More than 80% of the silver mined comes as a byproduct of mining for other metals such as copper.  This means if global growth slows (think China) and copper demand/pricing slows with it, silver supply will be cut tremendously even if the silver price is rising.

I will leave you with this simple thought experiment to help illustrate how much physical silver is available.

There is currently about 2 billion ounces of above ground gold available for investment.  Historically the silver supply has been 15 times greater than the gold supply.  There is about 15 times more silver in the earth's crust and the silver price historically has been 15 times less than gold due to this fundamental supply ratio.

So how much above ground silver is available today for investment?

Less than 1 billion ounces.  There is currently less than half the amount of above ground silver available compared to gold.  Silver is currently 55 times less expensive than gold, but based on the current supply ratio it should be at least twice gold's price.

To summarize: Global growth slowing means less silver produced due to its byproduct nature discussed above.  Central banks will respond will an increase in the money supply to counter the slowdown.  Global quantitative easing. 

Investors will rush to silver to protect their purchasing power and when they do they will find out that there is no physical silver available.  At that point a process called "price discovery" will take place when the paper price of silver will adjust to the correct supply and demand value.

Look forward to corrections as an opportunity to add to your positions.  I am often asked the best way to begin to purchasing gold and silver.  The company I recommend using is Goldmoney. I have purchased precious metals with Goldmoney for over 6 years, and members of my family use their services as well.  Even if you do not plan on purchasing today it is a good idea to take a few moments of your time and open an account and have it ready so you have the ability to buy when the time is right.  They are one of the most respected organizations in the industry, and I have provided a link here:

GoldMoney. The best way to buy gold & silver

"Gold was the investment of the last decade.  Silver will be the investment of this decade."

                                         - Billionaire Eric Sprott

h/t Wealth Wire, Casey Research