A nice chunk of silver - photo courtesy of Wikimedia Commons
This is part 2 of a multi-part series on silver. The first article I posted on this blog back in early May “Some Thoughts on Silver – part 1”
Silver Mining
An important thing to consider is that there really aren’t many pure silver mines (I listed a few in my last article on silver). Silver is mined mostly as a by-product of other metal extraction. Silver seems to have a particular affinity for base metals like zinc, nickel and lead, and copper to a lesser degree. Gold is also a frequent partner to silver.
Mining giants like Goldcorp, Barrick and Newmont frequently have a silver stream in their gold mines. Other base metal miners like Xstrata and VALE Inco will mine poly-metallic deposits which will also contain varying proportions of nickel, lead, zinc, copper, gold and silver.
What this happy little factoid means for the silver supply and price, is that periods of recession and therefore decreasing demand for industrial metals like nickel and zinc will also depress silver production, and therefore increase scarcity.
As the greater part of silver produced each year is for industrial uses (about 80%), and investment demand happens at the margins, now we begin to understand silver’s volatility a little better. A few more million Chinese citizens bidding up a shrinking pile of silver coins and bars will may have predictable effects on the silver price.
Industrial Uses of Silver
Speaking of those industrial uses, there’s tons of them. Water filters and bactericidal clothing. Batteries, bearings and brazing. Mirrors, coatings and catalysists. Lots of uses. Destructive ones. Which means that most of the silver produced year is effectively “lost”. Most of it, some of it is actually recovered, although it is quite labor intensive. But with cheap labor, anything’s possible, from building big walls, to extracting silver from mountains of e-scrap in (you guessed it), China.
Remember when each one of these were the fastest PC money could buy?
Some of the more unusual uses of silver include electronics and water purification. Solar energy though is one application that bears watching. From to the Silver Institute:
Silver paste is used in 90 percent of all crystalline silicon photovoltaic cells, which are the most common type of solar cell. Around the world, solar arrays are being tested for large and small-scale electricity production. In Europe, photovoltaic systems commonly are used to power private homes and local businesses. South Korea is constructing photovoltaic electric power plants to provide significant sources of electricity for the nation’s power grid. In the United States, nationwide stores such as Macy’s and Wal-Mart are installing photovoltaic systems on the roofs of their buildings to contributing up to 40 percent of their power needs. Photovoltaic systems are simple and provide immediately useful power with no pollution.
An oft-quoted study by Barclays Capital predicts increasing demand for silver due to photovoltaic panel uses. Although I couldn’t find a direct link to the study, there’s plenty of web articles making reference to it. Here’s one from the International Business Times: Solar Panels to Support Demand for Silver
While thin-film cells are gaining some traction in the market, Barclays notes PV cells still represent about 90% of all solar cells produced. If it is assumed around 0.1 grams of silver are used for each watt generated and each panel has the capacity to generate 200 watts, this suggests an average solar panel could contain as much as 20 grams of silver.
Barclays estimates this equates to more than 800 tonnes of silver being employed in cells in 2009, which translates to about 8% of silver industrial demand and 4% of global silver supply. On the group’s numbers this had the capacity to double in 2010, while Barclays estimates silver usage in solar panels could hit 2,000 tonnes by 2012. This would equate to about 7% of global silver output.
Let’s work with the figure, about 20 grams of silver per 200 Watts, which means 100 grams of silver, or a little over 3 ounces per 1 KW.
Depending on the size of the photovoltaic system installed, from 1 KW to 10KW, costs per watt can range from $6 to $12.
A typical mid-size 2 KW system should then run about $16,000 to $20,000 installed, and use up about 6 ounces of silver. At $30/oz spot price for silver x 6 ounces, that gives us $180 in silver costs for a middling system. At $60 per ounce spot price means an incremental cost of $180 for the solar panel manufacturer (or $360 total), and eventually, the consumer.
Although it’s a nice trend to watch, and hopefully profit by, funny things happen in free marketplaces. As the costs of some inputs rise, substitutes start playing a bigger role as producers need to find ways to cut costs.
Ah, but then again, the marketplace for solar panels is not exactly a purely free market, riddled as it is with price distortions like federal and state tax credits, as well as power utility incentives. Not that this is altogether a bad thing, just that the price sensitivity of the final consumer may be offset by larger credits and tax write-offs, so even a doubling in the silver spot price may not matter much as an input cost.
For free markets such as photography, no such luck. Eastman Kodak in particular is singing the blues. From the Wall Street Journal:
No Silver Lining Left For Users of the Metal
We’re raising prices, indexing contracts, hedging and moving as fast as we can with the part of the portfolio that’s not silver dependent,” Eastman Kodak Co. (NYSE: EK – News) Chief Executive Antonio Perez told analysts in an earnings call Thursday. Rising commodity costs, especially for silver used in film manufacturing, helped drag Kodak to a first-quarter net loss of $246 million.
Every $1 increase in the per-ounce price of silver subtracts $10 million to $15 million from the Rochester, N.Y., company’s bottom line. Kodak increased motion-picture-film prices in March and might have to do that again, Mr. Perez warned. The company also is trying to shrink its dependence on silver.
Conclusions
Silver is considered a precious and monetary metal, like gold. Quite unlike gold, which has negligible industrial use, most of the silver produced each year is “destroyed”, or rather, used in such a way as to not be recoverable. By comparison, most of the gold mined since the beginning of time is still around. Eastimated ratios of gold to silver, as naturally occurring in the earth’s crust, range from 8 to 1 to 15 to 1.
This relative lack of physical silver for investment purposes, paired with the increasing affluence of Indian and Chinese consumers who have a historical affinity for silver as a savings vehicle, the ongoing devaluation of the US dollar the world reserve currency, and possibly increasing industrial uses, I think will lead to increased demand for the metal.
Right now the silver price has found support at around $34-34 an ounce, crashing down from the high forties back in April.
We bought most of our stock of silver when the price was in the teens. Since then, I’ve continued to buy the odd ounce or two on a semi-regular basis.
Will we see prices in the twenties again? Don’t know. I doubt it. But I’ll buy more if we do.
Will the price go higher than the nominal $48 price reached back in May? I think so. I’ll buy more if it does.
Hope you enjoyed this article. If you think the next one is going to at least as enjoyable, then by all means subscribe to this blog by clicking on the RSS feed. Thanks a bunch.
Like gold it seems like you can just hold onto silver forever. It will always be worth something.
Molly On Money recently posted..No, My House Has Not Burned Down…yet
Exactly – just a store of value, until it’s time to sell. I have a friend who bought some 1,000 oz bars when it was at $4 and $5 an ounce. He’s looking like a genius these days.
I like the VALE company because they do a lot of mining in strong emerging nations like Brazil, which have strong currencies and good future prospects. They also seem to have a well-run operation.
Paula @ AffordAnything.org recently posted..Quit Your Job, Travel, and Live Remarkably
Hi Paula – I also like the way VALE resolved the long-standing labor strike at the former INCO mine at Sudbury.
[...] Interested in the Silver Trade? 101 Centavos has a great post with Thoughts on Silver. [...]
I like the fact Silver has industrial uses apart from its ornamental value. China and India’s appetite hasn’t diminished for gold and silver and any pullback might be a good time to consider this investment.
I don’t have any yet, but I’m closely following the precious metals market.
Moneycone recently posted..Thrill Money Investing
Hi MC – the Chinese were only recently allowed by their government to own physical gold and silver, I think back in 2008 or 2009. Now its investment is actually being promoted. Look at this as a bit of a medium to long-term trend.
Thanks for that info! Who would’ve thought!
MoneyCone recently posted..Thrill Money Investing
[...] 101 Centavos with ‘Thoughts on Silver‘ [...]
Have to say, I was very leery about Silver in the high 40′s and posted my thoughts about a possible bubble. So, I wasn’t suprised to see it subsequently give back a big portion of those gains in very short order.
It has leveled off and seems to be avoiding a full collapse in price. You make an interesting case for the long-term viability of Silver at these current prices or beyond, not only due to supply issues but also the cultural interest generated by newly powerful economic engines in Asia.
I’m still leery about buying now, but there’s a solid case for doing so as you mention. It’s fascinating, no question about it, at least for me.
Great post, thanks for sharing. This is going in my roundup for sure.
Squirrelers recently posted..Self-Employed? Self-Storage Could Make You Richer
I remember your post. It was a good one, and the timing couldn’t have been better. Speculator and short sellers seemed to have had their day with silver futures. There’s another factor which may play into the long term picture, and that’s a movement in Mexico to have silver as a backing for the currency.
Great article. Never thought about all that silver being destroyed. So wouldn’t that spike the price even more with decreasing supply? Could you clarify, you would be silver in the 20′s and if it spikes to the April high of 40′s?
Buck Inspire recently posted..Photozini Review
Hi Buck, some industrial uses are fairly price elastic. For example, a maker of bactericidal hospital clothing won’t really care that the price of a 0.01% input has doubled or tripled in price, as it has negligible effect on the total cost. Another effect might be investors and savers buying the physical metal in bars and coins, and just holding on to it, effectively removing it from the trade market.
[...] 101 Centavos with ‘Thoughts on Silver‘ [...]
Great article, 101
I didn’t know that you can’t “recover” silver with its use in industry either, good to know.
I bought some silver a few weeks before its peak and haven’t bought any more since, but I do plan to.
youngandthrifty recently posted..Weekend Ramblings and PF Blog Love: Oh Canada! Edition
Hi Y&T – I bought a couple of ounces recently, as well as some more shares in Silver Wheaton for my 401K.
[...] Thoughts on Silver – Part 2 (101 Centavos) [...]
There is some recycling of silver that occurs. This is somewhat old but informative: pubs.usgs.gov/circ/c1196n/c1196n.pdf
I love silver and own some physical myself. I bought my first silver in 1989 for $5 and change. I also own SLW in my retirement account too. I was able to get some more when the price dropped because I owned puts at $42.
Personally, I think we might be in for a longer consolidation phase of 9-15 months for gold and silver.
cashflowmantra recently posted..CFM Joining the Yakezie Challenge
Hi CFM – 9 to 15 months consolidation is not out of the question for precious metals, although gold seems to be on a steadier uptrend compared to silver. I don’t really know about the short term, but long term, I think the prospects are just swell.
[...] all know how hot gold has been this year, but what about silver? 101 Centavos gives us insight on investing in silver. My parents were recently asking me about silver, and it’s hard to find unbiased and [...]
The people who really made out with silver were the people who saved their coins in the 60s. From there it’s up well over 2000% — double-digit returns.
mbhunter recently posted..Enjoy little financial loopholes before you cause their closure