Silver is more than a Precious Metal

Silver is often referred to as a precious metal. It's much more than that. Although silver has been used as a monetary metal, it is more of a commodity, being used in a myriad of products and processes. Most of the silver presently used is in three activities: (a.) industrial uses, (b.) jewelry and household-ware, and (c.) photography.

Certainly, use in industry is increasing because of silver's inclusion in many products including automobiles, computers, semiconductors and solar panels, electrical transmission gear, medical devices, chemical catalysts, etc.; typically, between two and three million tons of silver are being used every day in industrial production. Jewelry is also an importance use of silver, especially in Asian countries where silver jewelry is considered favorably as a display of affluence. However, use of silver is decreasing in film photography. This decrease is because of the increased use of digital cameras (although silver is being used in high end papers for digital printing).

Another increasing use of silver is for investment. Many governments are now selling silver in the form of silver coins. Silver coins, typically in one ounce size, are being promoted and sold to the public at near silver bullion prices; think "American Silver Eagle". These plus other investment vehicles which contain silver are increasing in popularity.

What about the other side of the supply-demand equation, the supply? In the USA, silver mined and processed is down about 30%. Nevada (the silver state) which formerly produced the majority of mined silver has had a 50% decline in silver production. Silver mining in other countries is either level or slightly down. Presently, Mexico is the largest silver producer, producing about 16% of the current supply. Other silver producers are the USA, Canada, Bolivia, Russia, Australia and Germany; as can be noted, no nation produces a major portion of the silver supply. Although silver output is likely to show an increase over the next few years, silver production may decline sooner than later because very low silver prices during the past decade have not supported silver exploration nor openings of new mines. Further, corresponding to the decrease in silver-halide film use, there is a decrease in the supply of recycled silver because the major supply of recycled silver has been from processing used film. All in all, during most of the past half century, consumption of silver has been far greater than its production.

More importantly, it is estimated that there may be a "peak silver" situation because most silver is located near the earth surface, where silver has been relatively easy to mine. Thus, it has been mined. It is estimated by the US Geological Survey that below ground silver (silver which is yet to be mined) is in shorter supply than any other precious metal and than most other industrially used metals. So, both supply and demand indicate that silver may become in short supply over the coming years.

If so, is it worthwhile now to consider silver for investment? - - Yes; it's probably worthwhile for a small investment, but not for a major investment at this time. For those who are looking ahead a few years, however, there are a number of factors coming together which may cause the price of silver to make significant upward moves. One is that Asian economies are growing and have an increasing need for industrial commodities including silver. Also, with increased prosperity in Asia where silver is regarded highly as a display of wealth, silver jewelry demand is increasing in concert with that increasing affluence. Additionally, the continuing weakness of the US dollar is providing a basis for increasing silver prices, both as a commodity and as an investment vehicle. Although the value of the US dollar has recently strengthened in relation to other world currencies, US dollar purchasing power continues to slide. There is every indication that the US Federal Reserve will continue to lower interest rates to keep the US economy humming; such action will further cause dollar weakness.

Silver can be a very good inflation hedge, but silver prices tend to fall in a depression environment. That's because silver is also a commodity and, unlike gold, is not considered to be a true monetary metal. Thus, when the wheels of industry slow, use of silver slows.

But in inflationary times, silver has advantages for the small investor. Silver coins are a convenient store of small amounts of wealth. As such, silver can be traded more conveniently than can gold coins or precious stones. Gold is considered to be a hedge against currency problems and, as a kindred metal to gold, there is a usual historical ratio of gold prices to silver prices of approximately 60 to 1.

That 60 to 1 ratio has meant that, for example, a gold price of $60 would mean a silver price of $1. More realistically today, a gold price of $800 would equate to a silver price of $13.50 which is more or less in line with the current silver price of $14. In the context of some gold bulls expecting gold prices to enjoy a meteoric rise, one could expect silver prices to enjoy similar appreciation. A conservative guess would be for silver prices to be between $17 and $18 per ounce by mid-2008.

Therefore, putting a small amount of investment money in silver could be both timely and prudent. A very good way to purchase silver is to buy bullion coins such as the US Silver Eagle and the Canadian Silver Maple Leaf. These bullion coins are recognized because they are certified to be a specific purity and a specific weight (0.999 Troy ounces) by their issuing agency. Also, some coin dealers offer old silver US coins which contain significant amounts of silver; these coins are most often in bags of $1000 face value. Probably the most conservative purchase is a $1,000 face value bag of circulated U.S. 40% silver clad Kennedy half-dollars minted between 1965 and 1970. The bags contain approximately 295 ounces of pure silver. These coins are not only valuable for the silver content, but are negotiable US coins and as such have a $1000 floor. Both silver bullion coins and bags of use silver coins are available from most dealers of precious metals. Although it may be somewhat early in the inflationary cycle, a purchase of some silver coins at this point in time could be an appropriate investment as appreciation in the range of 20% could be realized as 2008 unfolds.

Conversion Table