Silver: The Poor Man’s Gold

Introduction

Silver remains one of the most prominent candidate in the metals complex as far as futures' trading is concerned. Thanks to it’s unique volatility silver remained hot favorite speculative vehicle for the small time traders. Though futures trading was banned since late sixties, parallel futures markets are still very active in Delhi and Indore. Speculative interest in the white metal is so intense that it is believed that combined volume of Indian punters represent almost 40 percent of volume traded at New York Commodity Exchange. Delhi Rajsthan, MP and UP are the active pockets for the silver futures. Until recently, Rajkot and Mathura were conducting futures but now players have diverted toward comex trade.  Most of the world's silver is mined in the US, Australia, Mexico, Peru, and Canada. Cash markets remain highly unorganized in the silver and impurity and excessive speculation remain key issue for the trade. Taking cue from gold now government of India is planning to introduce hallmarking in silver which is likely to address quality and credibility of Indian silverware and jeweler industry.

Silver ore is most often found in combination with other elements, and silver has been mined and treasured longer than any of the other precious metals. Mexico is the world’s leading producer of silver, followed by Peru, Canada, the United States, and Australia.

The main consumer countries for silver are the United States, which is the world’s largest consumer of silver, followed by Canada, Mexico, the United Kingdom, France, Germany, Italy, Japan and India. The main factors affecting these countries demand for silver are macro economic factors such as Gross Domestic Product growth, Industrial Production, income levels, and a whole host of other financial macro economic indicators.
 

Demand for silver is built on three main pillars; industrial and decorative uses, photography and jewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption.

Why is this indispensable metal in such demand? The reasons are simple. Silver has a number of unique properties including its strength, malleability and ductility, its electrical and thermal conductivity, its sensitivity to and high reflectance of light and the ability to endure extreme temperature ranges. Silver’s unique properties restrict its substitution in most applications.

Silver is used extensively for industrial purposes due to its unique properties, such as high electrical and thermal conductivity, malleability, ductility, and its resistance to corrosion. The electronics and photography industries are the main consumers of silver, as silver is an integral component in most electronic equipment, as well as film and film processing chemicals.

Industrial uses of silver account for nearly 90% of the total use of silver in recent history, with the remaining 10% being used for coinage and jewelry. Silver is used heavily in the photographic industry in all areas from actual film used in cameras, to plates, sensitized paper, as well as in all photocopying machines and most fax machines. Silver is also in high demand from basic industry. Almost every on/off switch used in electrical equipment and appliances uses silver as a component. Silver is also used in solder and brazing alloy to join metallic surfaces, as well as in electro plate and sterling production.

Silver is also used in the production of bearings, as electroplated Silver bearings have greater fatigue strength and load carrying capacity than any other type.  Silver also facilitates the joining of materials (called brazing), producing a leak-proof, smooth, corrosion-resistant joint in manufactured goods.  Silver is also used as a catalyst in the production of formaldehyde, which has production estimated at 15 billion pounds a year.  Formaldehyde is an essential ingredient in the production of adhesives, laminates, finishes for paper and textiles, surface coatings, including paints, dinnerware and buttons, packaging materials and much more.  Silver is also used in the production of Mylar recording tapes, which makes up 100% of the recording tapes sold today.  An estimated 23 million ounces of Silver are used daily in the catalytic oxidation processes described above.
 

SUPPLY:

The main supply of silver comes from mine production, scrap operations, and hoarding. Approximately seventy percent of the silver mined in the western hemisphere is mined as a by-product of other metal products, such as gold, copper, nickel, lead, and zinc. As such, the price of these metals greatly affects the supply of silver mined in any year. As the price of the other metal products increases, the increased profit margin to mine operations stimulates greater production of the other metals, and as a result, the production of silver increases in tandem.

Silver is also mined directly. This is an important but smaller percent of the total production of silver each year. Silver coming directly from silver mining operations accounts for approximately 20% of the silver mined each year.

The Supply of Silver is based on two facts, mine production and recycled Silver scraps. Mine production is surprisingly the largest component of silver supply. It normally accounts for a little less than 2/3 rd of the total (last year was slightly higher at 68%). Fifteen countries produce roughly 94 percent of the worlds Silver from mines.  The most notable producers are Mexico, Peru, the United States, Canada and Australia.  Mexico, the largest producer of Silver from mines.  Peru, the world’s second largest producer of Silver.  Silver is often mined as a byproduct of other base metal operations, which accounts for roughly four-fifths of the mined Silver supply produced annually.  Known reserves, or actual mine capacity, is evenly split along the lines of production.

The mine production is not the sole source-others being scrap, disinvestments, government sales and producers hedging. Scrap is the silver that returns to the market when recovered from existing manufactured goods or waste. Old scrap normally makes up around a fifth of supply. Scrap supply increased marginally last year up by 1.2%, to reach 184.9 Moz (5751 t).

Disinvement and government sales are similar in that both comprise return to the market of old coins and bars respectively by the private sector or the government. But these sources may not add to supply every year on a net basis. Net Government sales fell sharply in 2002.

The other major source of Silver is from refining, or scrap recycling.  Because Silver is used in the photography industry, as well as by the chemical industry, the Silver used in solvents and the like can be removed from the waste and recycled. The United States recycles the most Silver in the world, accounting for roughly 43.6 million ounces.  Japan is the second largest producer of Silver from scrap and recycling, accounting for roughly 27.8 million troy ounces in 1997.  In the United States and Japan, three-quarters of all the recycled Silver comes from the photographic scrap, mainly in the form of spent fixer solutions and old X-ray films.

Global silver production edged slightly lower in 2002, slipping from the record levels set in 2001 to finish the year at 585.9 Moz, a decline of around 1 percent.
 

SILVER (TONNES)

In recent years, the main world demand for silver is no longer monetary, but industrial. With the growing use of silver in photography and electronics, industrial demand for silver accounts for roughly 85% of the total demand for silver.

Though Silver has a long and distinguished history as being the metal of commerce, it has shifted roles in recent years to be more of an industrial metal than a precious metal.  The single largest use of Silver is for industrial purposes, with the electronics industry making up the lion's share of this demand.  Jewelry and Silverware is the second largest component, with more demand from the flatware industry than from the jewelry industry in recent years.  The photography industry is a large user of Silver.  Silver is an important ingredient in both the manufacturing of film, as well as in film processing.  Silver coinage accounts for only a small portion of the demand for silver in recent years.

Silver is first and foremost an industrial metal.  Silver components are found in everything from light switches and circuit breakers, to personal computers, stereos, telephones, microwave ovens and automobiles. 

Jewelry and silverware demand has been steadily decreasing as a percentage of total use of Silver for many years, since manufacturing and electronics industrial uses of Silver increase. Though Silver is often thought of as a precious metal, in recent years the fastest growing segment of demand and use for silver has been from industry, hence we tend to view Silver as more of an industrial metal than as a precious metal.

India, the largest consumer of silver, is gearing up to start hallmarking of the white precious metal by April. India annually consumes around 4,000 tonnes of silver, with the rural areas accounting for the bulk of the sales.

As in the case of gold, demand for silver in India during 2002 witnessed a sizeable dip with imports falling an estimated 45 percent to around 2,500 tonnes with prices scaling new heights and rural consumers impacted by widespread drought. "According to information currently available, it seems likely that Indian silver demand will be down close to 40 percent year-on-year. This is due to a combination of higher prices and the negative impact of a patchy monsoon, especially in the north," says a report by the Standard Bank London Ltd.

On the demand side, a 9 percent drop in jewelry and silverware offtake, mainly due to a drop in Indian demand, contributed to a 3.5 percent drop in global fabrication to 838.3 million ounces. If the Indian anomaly is excluded from the overall picture, total silver fabrication would have risen 1 percent. The drop in silver demand in India is pegged to a 7 percent rise in the Indian Rupee and a poor year for farmers.

India's demand for silver increased by 177 per cent over the past 10 years as compared to 517 tonnes in 1991. According to GFMS, India has emerged as the third largest industrial user of silver in the world after the US and Japan.
 

IMPORTS OF SILVER IN INDIA IN 1999-2000 TO 2001-2002

EXPORTS OF SILVER IN INDIA IN 1999-2000 TO 2001-2002

It has been one of the deep-rooted habits of the Indian people to spend a considerable part of their incomes every year for the purpose of gold and silver, partly as unavoidable expenditure on the occasion of marriage and other social ceremonies, and partly as a safe method of investing their savings. Further, as India produces only a small quantity of gold and practically no silver at all, these precious metals have always been imported for monetary as well as non-monetary purposes.

The world’s output of silver during 1493 to 1932 was estimated at 15,486 million fine ounces, out of which an amount of 3,000 million ounces was lost or destroyed, an amount of 4,940 million ounces was added to the monetary stock, and the rest amounting to 7,546 million ounces was added to the non-monetary stock. The Indian share of the monetary stock amounted to 1,119 million ounces or 22.7 per cent, and of the non-monetary stock to 3,300 million ounces or 43.6 per cent. The official statistics of annual imports of treasure (i.e silver coin and bullion, and gold coin and bullion) and of merchandise show that the ratio of the imports of precious metals to the imports of merchandise remained practically unchanged during the period 1879 to 1929. The steep fall in the imports of precious metals during the quinquennium ending with 1898 to 1899 was due to the disastrous effects of famines and epidemics during the period. The spectacular rise in the demand for imports in the decade preceding the First World War was due to a great increase in monetary demand for precious metals. Another noteworthy feature of these imports is that the relative importance of silver and gold imports had considerably changed since 1900, the demand for gold rising relatively to that of silver.

Large proportion of silver imports had always been used for coinage of silver rupees, and a considerable proportion of gold imports during the period of the Gold Exchange Standard in India, 1898 to 1914, was similarly used for monetary purposes. The distinction between monetary and non-monetary transactions in gold and silver is basic for an analysis of the external aspects of the Indian economy, because the transactions in monetary gold and silver constitute accommodating transactions in the balance of payments, while the rest of the transactions in the two precious metals are autonomous. For the period under consideration the official statistics of India give data separately for the imports and exports of gold and silver coin and bullion, and for trade on both private and government account.

A surge in Indian silver demand during the second half of 1996 represents the year's most dramatic increase in consumption. For the year as a whole, total imports through India's two official channels amounted to lust over 100 million ounces representing a rise of more than 30 percent from the 1995 level. The increase was due to a number of factors including the rising level of consumer demand for silverware coupled with good harvests, particularly in the Northern tribal belts where heavyweight silver jewelry remains the favored method of saving among rural populations. The rise in demand was not simply a price-related phenomenon. In fact, the year's average price rose by 6 percent. He explained, however, that the fall in the price during the course of the year helped accelerate the pace of imports which rose from 13 million ounces in the first quarter to a new record level of almost 35 million ounces in the fourth quarter.  

a) Income Elasticity of silver:

(i) In the overall economy of the country gold has the highest income-elasticity relative
    to silver and merchandise.

(ii) The estimate of the income-elasticity of demand for silver imports is negative, and calls for
     an explanation.  Firstly, it is possible that the true value is small, though positive, and the
     estimate  is  affected much by sampling errors. Secondly, it is also reasonable to suppose
     that,  when income  rises without any change in prices, people regard silver as an inferior
     commodity.

b) Price Elasticity of silver:

(i) As is natural, price elasticities of demand for imports of gold, or silver, or merchandise
   are negative, an increase in price of any of these items reducing the demand for it.

c) Cross-price elasticities:

(i) The cross-price-elasticities of gold and silver are both positive, and hence, they are
    substitutes for each other.

SILVER PRICES:

Because silver is a precious metal, its price is determined by the supply and demand ratio at any given moment. As is the case with other precious metals, there is a limited amount of silver in the world. It is not a product that can be manufactured en masse, and, therefore, is subject to issues such as weather and politics that may affect silver mining operations.

Unlike the price of solid gold, silver prices were fairly stable throughout the decades between 1950 and 1970, however, there was a strong upturn in the late 70s that lasted into the 80s. Silver prices went from around $2 to over $20 and then started to move back down. By 1990, silver had dropped again to around $5.
 

The Prices of Silver had hit a high of 20.65USD per Oz in the year 1980. After that, there has been a decline in prices of silver over the next 2 decades. This decline is broken by some increases in prices in 1984, 1986,1994, 1998 and recently in 2002.

         One of the reasons for the sudden decline in Silver prices from 1980’s till now is the decline in its demand as an investment option by customers. However, according to the Silver Institute, 2002 for the first time, in over ten years that there was an increase in silver investment. Because silver can be an important store of value. For example, between 1971 and 1981, the U.S. dollar lost more than half of its value, while silver prices rose nearly five times.

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