Silver is the magic metal. It is largely irreplaceable in applications for industry, medicine, dentistry, and jewelry. No other metal is as reflective or as conductive, only gold is more malleable, and silver has unique antibacterial properties. It alloys readily with other metals, resists corrosion, and is photosensitive to gamma and x-rays. And now, silver seems to be reflecting a new kind of magic: demand is increasingly influenced by its value as an investment and it’s that demand that seems to be driving the price of silver ever higher.

 

A glance at the list of industrial applications is persuasive that silver is indeed a metal with clout and versatility. It’s used in electronics, windshields, thermal windows, nuclear reactors, commercial and military high-performance jet engines, cell phone covers, plastics and textiles industries where it’s used as a catalyst for chemical reactions, batteries, brazing and soldering, electroplating, photography, solar energy, and mirrors and coatings.

 

Medical applications of silver pertain to its unique antibacterial properties that make it effective for treating minor infections and burns. It is administered to newborn babies’ eyes as a prophylactic against a form of conjunctivitis that can lead to blindness. And research is being conducted in UK hospitals into the effectiveness of using silver compounds in bed linens and pyjamas to inhibit the spread of dangerous antibiotic-resistant infections which have caused several illnesses and deaths in modern hospitals.

 

Silver has long been known to be effective in purifying water. It both improves taste and kills E.coli bacteria; it’s used in air conditioning systems to kill bacteria that cause Legionnaires disease; and it is also used to remove warts and surface ulcers. A trip to your local yoga-wear store should tip you off to another new use: silver is being used in clothing to regulate body heat and odour.

 

According to the USGS Mineral Commodity Profile (2001), silver is most often associated with sulfide ores of copper, lead and zinc and sometimes bismuth and antimony. It is always found in gold deposits. 80-85% of world silver resources are found in sulfide ores and oxidized sulfide ores; the remaining 15-20% is produced from gold and gold-silver ores. Usually silver sulfide, and silver bearing lead-zinc sulfide ores are mined below ground, but silver-bearing copper and gold ores are produced above ground.

 

 

Top 20 Silver Producing Countries 2005 (millions of ounces)
1.	Peru	102.6
2.	Mexico	92.3
3.	Australia	77.4
4.	China	64.7
5.	Chile	44.3
6.	Russia	42.2
7.	Poland	40.5
8.	United States	39.2
9.	Canada	34.1
10.	Kazakhstan	25.9
11.	Bolivia	12.8
12.	Indonesia	9.9
13.	Sweden	9.1
14.	Morocco	7.4
15.	Argentina	5.2
16.	Turkey	5.2
17.	South Africa	2.8
18.	Iran	2.6
19.	Uzbekistan	2.2
20.	India

 

 

Top 20 Silver Producing Companies 2005 (millions of ounces)
Company		Country	Output
1.	BHP Billiton	Australia	53.8
2.	Industrias Peñoles¹	Mexico	47.4
3.	KGHM Polska Miedz	Poland	40.0
4.	Kazakhmys	Kazakhstan	20.5
5.	Polymetal¹	Russia	18.9
6.	Grupo Mexico	Mexico	18.5
7.	Cia. de Minas Buenaventura²	Peru	15.3
8.	Rio Tinto	UK	14.9
9.	Coeur d'Alene Mines¹	USA	13.7
10.	Xstrata	Australia	13.3
11.	Falconbridge³	Canada	12.5
12.	Pan American Silver¹	Canada	12.5
13.	Barrick Gold	Canada	12.5
14.	Volcan Cia. Minera	Peru	11.1
15.	Zinifex	Australia	9.7
16.	Codelco4	Chile	9.2
17.	Newmont Mining²	USA	9.2
18.	Cia. Minera Ares¹	Peru	7.6
19.	Boliden AB	Sweden	7.3
20.	Goldcorp5	Canada	7.2
¹ Primary silver producer based on revenue
² Includes equity production from Minera Yanacocha
³ Merged with Noranda in June 2005
4 Estimate
5 Goldcorp acquired Luismin in the merger with Wheaton River in April 2005

 

While the World Silver Survey 2006 states that silver mine production grew a modest 3% through 2006, it is optimistic about growth through 2007. Contributing to growth in 2006 were large increases in silver production at two of the world’s largest mines, Penoles’ Fresnillo in Mexico and BHP Billiton’s Cannington in Australia. 4% volume increases in Peruvian silver production were also recorded. Offsetting the increases were decreases in Canadian mine production predominantly, as well as more modest decreases in Poland, USA and Bolivia.

 

Silver is consumed mostly by India, Japan, the US and the EU with industrial nations consuming silver for industrial applications. Other types of demand are determined more by the customs of the country. Traditionally, India has consumed large amounts of silver for jewelry, as has Japan for photography. Recently, India has dramatically increased its industrial fabrication demand, while demand for photography has declined worldwide.

 

By far the largest section of the demand pie is industrial fabrication, taking up the lion’s share of world silver demand at 46% in 2006. Silver is expensive, so industry uses silver only where it is irreplaceable. Even so, industry continues to find silver worthwhile for a wide variety of applications, allowing the Silver Institute to boast that silver is ‘the indispensible metal’. Indeed, under the weight of rising prices, industrial demand increased by 11% in 2005, reaching 409.3 Moz of growth. The Silver Institute cites the global rise in electrical and electronics demand as the reason, causing notable industrial fabrication demand increases of 58% in India and 15% in Japan in 2005. Even though industrial fabrication demand has shown itself price-insensitive, experts sound a warning about industry’s ability to continue footing the bill if prices remain high.

 

By the end of 2006, with the world electronics cycle relaxing after a peak, and a downturn in world GDP, the industrial demand is expected to level off and possibly decrease in 2007. That, along with the dramatic decline in photographic demand due to digital photography, and a decline in jewelry demand leaves us looking a little less magical.

 

As silver soars above its equilibrium point of $6.50-7.00 USD/oz, silver has become attractive as an investment. This is due largely to the new silver Exchange Traded Fund, ETF, which prompted a spike in silver price in April/May of last year.

 

So as demand has increased due to investment, supply has been slow to respond. Mine production makes up the bulk of world supply, scrap constitutes the second largest source, followed by government sales and hedging, all of which prove to be somewhat unresponsive to demand.

 

Primary silver mines are relatively scarce, making up 29% of silver production. The remaining 71% is a by-product of mining other metals. But only primary silver mine production is responsive to silver prices. So while demand is increasing and the price of silver is increasing, silver production remains sluggish.

 

Following the trend of base metals, particularly gold, silver prices have been climbing in recent years. In 2006 silver prices averaged $11.20 USD per troy ounce, surpassing highs of 2005, 2004 and 1987. With the advent of the ETF in April 2006, silver prices hit a high of over $14.00. Steve Butler, MBA, senior analyst and Vice President at Canaccord Adams comments, “the ETF created a huge level of demand. [It] was even more successful than the gold ETF. You always knew there was a silver bug out there, particularly in the US and the ETF proves it.”

 

The World Silver Summary 2006 concurs, “investment demand remains the main driver of the price, and has raised silver to well above its equilibrium level that would likely prevail in the absence of investment.” All this investment buzz creates speculation, which was evident especially leading up to the launch of the ETF. Steve Butler cites speculation as the cause of predicted volatility in the silver market.

So what’s the upshot? GFMS nails it: we can expect significant price volatility, but a spike to $15 is very possible!