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Silver Production Failing to Keep Up With Demand
What many people may not realize is that there is a finite amount of silver in the ground. Like gold, there is a certain amount of “proven reserves”, representing the un-mined portion of worldwide silver supply. However, unlike gold, an ever-increasing amount of global silver supply is getting consumed, with little hope of future recovery, through recycling.
According to the Silver Institute (http://www.silverinstitute.org/supply_demand.php), the worldwide production of silver was 735.9 million troy ounces, in 2010. Demand is quickly outstripping supply. Per the same report, The Silver Institute estimated that demand for silver rose 12.8% to 878.8 million ounces. The difference between supply and demand was met through recycling. Recycling had been a viable, stopgap solution to the supply and demand imbalance. However, with the recent, dramatic changes in the composition of silver fabrication demand, recycling is increasingly at risk of collapse.
There are a couple of reasons for fabricators to be worried. The first cause lies with the fabricators, themselves. As recently as 2000, a large portion of silver fabrication demand originated from the non-digital photography industry. Silver was traditionally used as part of the chemical process of producing pictures. Because of the way the industry was structured, the process of gathering and extracting the unused silver from the photography process was straightforward. As important, the metal recovery rate was very high. The result was a consistent supply of recycled silver. As the photography industry migrated to a digital format, the need for silver declined dramatically. With the decline came a corresponding reduction in the amount of recycled silver available for re-use.
The second major source of silver recycling has been the end consumer. End consumers were great contributors to scrap silver. In the late 1990s, when gold hit historical lows, the price of gold jewelry came within reach of the average consumer. This was coupled with the perception that silver held little value. As prices of gold and silver have marched upward, gold is increasingly being substituted with silver. In and by itself, this change would not have been material. However, with silver prices rising quicker than gold, the consumer’s attitude toward silver has changed, as well. Today, silver buyers view the precious metal as a viable and valuable piece of jewelry, not to be readily disposed of. The result has been a reduction in the amount of silver coming from consumers into the recycling stream.
The third major source of silver was central banks. Prior to the demonetization of silver and gold, central banks around the world held massive hoards of silver. When the US stopped including silver in their circulating, coin currency, a major source of “recycled” silver became available for industry. Since the 1960s central banks have actively sold silver into the market, creating an artificial sense of healthy supply. The byproduct of flooding the markets with so much material resulted in artificially low prices. These low prices significantly curtailed much-needed capital investment in silver mining operations. The result was atrophy in production capacity.
Fast-forward to today. Central banks have substantially depleted their silver inventories. Recycled silver supply is quickly drying up. New fabrication demands for silver have exploded. These new, fabrication uses use silver in such small quantities that recycling it at current prices is completely non-viable. In many of these instances, the price of silver would need to rise to a level that is many times the current level, in order to make recycling profitable. However, unlike traditional photography, where silver usage is quick and recycling is straightforward, new applications use silver over a long period of time.
An example is solar power. According to industry experts, 20 grams of silver is used in the production of a single, 200 watt solar panel. The silver used is encapsulated in the panel for a period of 20, or more years. Such a long usage cycle makes solar panel, silver recycling a lofty goal for the far future, at best.
Based on current supply and demand growth, silver is set to soon enter a supply crunch. This supply crunch will lead to massive shortages of the metal. For those lucky enough to obtain this precious metal, the pricing will be at a significantly higher level than it is today. It is anybody’s guess what will happen over the next two to four years. However, one thing is certain. If the silver industry does not find a way to balance supply and demand, the effects of their failure will be felt worldwide.
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