Why is Silver so important in today's industrial world?
The Fundamentals Today, Silver is used for industrial purposes, decorations photography, and medicine. Its combination of strength, malleability and conductivity makes it a major element, in the commodity market. It is the precious White metal to Gold's Yellow, and investors should know what affects the price of Silver, what investments can be made, and how it is traded prior to making a decision to enter the Silver as an investment. Silver is a commodity, it is widely used for both industrial and investment purposes. Gold's price is for the most part driven by investment demand, with only about 11% driven by industrial usage. Silver's industrial demand on the other hand is over 50%. According to The Silver Institute in April 2011, Silver's world industrial use is forecasted to increase about 36% between Y's 2011 and 2015, from 487.4-M oz. to 665.9-M oz. Based on the Y 2011 demand figures, Silver's industrial use comprised about 50% of the usage, with jewelry and physical Silver demand consisting of about 31%. The remaining demand is divided between photography and silverware. This growth in Silver's industrial use in Y's 2007-2010 is remarkable considering that in Y 1990 industrial demand made up just 39% of its use. As of Y 2010, the majority of Worldwide demand for Silver comes from the industrialized world, with the United States, Europe and Japan accounting for over 50% of that demand. But, the developing countries including China and India have increased their demand for Silver and this trend is expected to continue as their economies grow. As a result of industrial demand making up over 50% of Silver's use, a recession or weakening of industrial demand has an impact upon Silver prices. The economic outlook of the World economy drives a much of Silver price speculation. During Y's 2007-2010 the emerging markets played a larger role because their demand for Silver. This demand is likely to increase as the list of uses for Silver increases in electronics, the automobile industry and the solar industry. Silver demand is largely price in-elastic in the short term because there is little substitution from metals for Silver. Silver is produced worldwide, with over 50% of worldwide production coming from 5 countries: Mexico, Peru, China, Australia and Chile. The world's largest Silver mine is in Australia, and as of Y 2010 this mine produced 38.6-M oz of Silver per year; the mine is owned by BHP Billiton (NYSE:BHP). Investing in Silver Silver Bullion Bars or bullion can be bought typically in 10 oz. bars, 1 kilogram bars, 100 troy ounce bars and 1,000 oz. bars. They must be stored, and yield no interest to the investor. Silver Coins Buying Silver coins is another method of physically owning silver, they sell for a premium over bullion bar prices, and like Silver bars they do not yield interest. Certificates Silver sertificates allow investors to buy and sell Silver without actually physically owning it, certificates are convenient. Silver Futures and Options Contracts In the US, Silver futures are traded on the commodity exchange, which is a part of the New York Mercantile Exchange. Investors and companies can use the contracts to hedge, invest or speculate on the price of Silver. Silver Exchange-Traded Funds (ETFs) Silver ETFs are another method investors can play Silver. These can directly hold Silver or invest in derivatives that track the price of silver. Mutual Funds Mutual funds can be used to gain diversification among Silver mining companies, they may require a larger investment than small Silver purchases. Silver Miner Stocks Investing in Silver miners requires knowledge of the equity markets, these companies do offer leverage to silver prices and may pay a dividend as well. Importance of the Gold-Silver Ratio Compared to Gold, Silver is very volatile. This is due to silver having a smaller overall market and the fluctuations between industrial and investment demand for Silver. As an example, from Y 2007 to 2012, silver went from about $14 oz. to almost $50 oz., and settled at close to $35 oz. as of February 2012. With this volatility, 1 of the most watched indicators by traders and investors is the Gold/Silver ratio. This ratio has varied widely across time, ranging from 12.5 in Roman times to over 100 in the early 1990′s. The average is a topic of controversy depending on the time period that is looked at, but over the past 35 yrs it has averaged about 55 oz. of Silver per oz. of Gold. The lower the ratio the more expensive Silver is compared to Gold, and vice versa. As we can see in the chart below, the Gold/Silver Ratio can widely differ from year to year.
The Overall Outlook There are a few Key drivers that will fuel Silver demand moving forward. This includes gross domestic product (GDP), solar demand and government regulation that may affect the solar industry. As GDP growth recovers from the depths of the Y 2008 credit crisis, silver demand should increase as well. This will be from the rise of consumer electronics, consumer goods and an increased use in the automobile and solar industries. It is important to note that as the price of Crude Oil increases, the use of solar power as an alternative energy source is expected to go up and so will the demand. Also, carbon legislation may force the price of power higher, leveling the field for solar energy. However, use of other renewable energy may limit the solar industry's rise to fame, which as of Y 2011 produces 20% of the world's renewable energy. Emerging economies are expected to increase their silver demand, outpacing industrialized nations. In Summary When investing in any commodity, investors should do their due diligence before committing any capital. Silver has been used throughout history as a symbol of wealth, and has found its way into industrial uses. This trend will likely to continue as Silver finds its way into more and more industries, including solar. For investors, there are a number of different ways to gain exposure, from owning silver physically, to investing in the stock of silver miners Whichever method is chosen investors should keep the Gold/Silver Ratio in focus, and it can be a choppy and wild investing ride. I follow Gold and Silver on Live Trading News with daily and weekly comprehensive fundamental and technical reports.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.