Don’t Write-off Silvers Investment Potential

Vivek Kaul, Economic Times, 19/7/2011

Source: http://economictimes.indiatimes.com/quickiearticleshow/9277089.cms

Silver is down. But surely not out. Its prices have been moving in the range of $32-36 per ounce (about Rs 50,000 to Rs 55,000 per kg) after crashing from $50 per ounce ( Rs 75,000 per kg; 1 troy ounce equals 31.1 grams).

But, according to experts, the precious metal would continue to be a good investment bet due to its widespread use in scores of industries.

Estimates suggest that a little over half of the demand for silver comes from industrial uses. What makes silver a great metal for industrial use is that it is the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvellous lubricant and a versatile catalyst and alloy.

Despite the fall in demand from traditional areas of silver use, more demand is expected to come from several other industrial uses of silver.

Solar Power

Solar panels needed for solar power use silver. As far as industrial uses of silver go, the solar energy sector is showing the most growth potential, says Devendra Nevgi, founder and principal partner, Delta Global Partners. A study titled The Future of Silver Demand, carried out by GFMS, a precious metals, base metals and steel research consultancy, says:

"Over the last decade, this sector’s offtake has soared from less than 2 million ounces to about 50 million ounces in 2010. This year, the demand is expected to reach nearly 70 million ounces, an increase of 40% year-on-year." David Morgan, editor of The Morgan Report and who runs the website http://www.silver-investor.com, says: "China has been growing its solar energy base around 100% a year since 2003. India plans to increase its solar output to 20 gigawatts by 2020, starting from basically nothing currently. China continues to project massive growth from the current 5.5 GW capacity to 30 GW by 2020," he says. "The US has forecast a similar amount, perhaps 30 GW by 2020. On a worldwide basis, the generating capacity by 2020 is projected to be 20 to 40 times the amount of current solar capacity."

In fact, with the tsunami in Japan bringing the world on the brink of a nuclear disaster, the demand for solar power is expected to go up further. This will fuel the demand for silver. Morgan feels the "solar demand could reach 130 million ounces per year around 2014 and continue through 2020". The silver production in 2010 was about 750 million ounces.

Medical Uses Of Silver

This is another area where the demand for silver is expected to touch 100 million ounces by 2020, says Morgan.

"Silver-based cleaners and bandages are being increasingly used throughout the world," he says. Silver is also used in catheters, pacemakers, valves, feeding tubes as well as medical appliances inserted in the human body.

Anti-Bacterial Agent

Silver has tremendous anti-bacterial qualities. Jeff Nielson, editor of http://www.bullionbullscanada.com explains: "My personal favourite industrial application for silver is as an anti-microbial agent. There are literally too many applications of silver making use of this property for me to even list them all."

Silver is used in anti-bacterial sportswear to reduce odour, anti-bacterial clothing for soldiers and medical personnel to reduce infections, and in food packaging, anti-bacterial upholstery, etc. The demand for this segment is around 38 million ounces of silver per year, he says.

"New uses for silver are being found almost every day, particularly in the biocide arena," says Jeff Clark who authored The Casey Research 2011 Silver Investing Guide. In fact, the Food and Drug Administration in the United States has approved the adding of silver to bottled water to helkill bacteria.

"The important point is government approval because this opens the door for major municipalities to use silver for water purification," says Morgan. But there is a caveat. As Nevgi explains: "Such demand carries the risk of technological obsolescence. For instance, the digital revolution in image capturing and storing has killed the demand for silver in the photography sector."

Is There Enough Silver?

The GFMS study expects the industrial demand for silver to shoot up from 487.4 million ounces to 665.9 million ounces by 2015. But the question is: where will the silver to service these new uses come from? As the accompanying table shows, the mine production of sil-bullionbullscanadaver has gone up by 33% since 1999, but the demand has gone up faster.

The difference is met through silver scrap or by reclaiming silver from applications where it has already been used. But it is not easy to recycle silver. As Clark says: "While scrap metal accounts for about 20% of silver’s total supply, many of these new applications are difficult to reclaim. Some applications contain such small amounts that they are uneconomic to recapture, such as many of the biocidal and nanotechnology applications. With others, it’ll be a long wait. Solar panels, for example, have a 20- to 30-year life.

Still others are waiting on more effective recovery programmes; more than half of all silver in cell phones, TVs, computers and other electronics still ends up in landfills." Given this, analysts expect a deficit situation. As Morgan puts it: "In about three years or so, we will see silver in a deficit situation where total supply mining + recycling will not meet total demand."

Also, a lot of silver is produced as a by-product of mining of other metals like gold, lead, zinc, etc. So it’s not easy to ramp up the supply of silver suddenly. "Gold mining has most likely peaked, and a full 13% of silver coming to the surface is a result of gold mining," says Morgan.

Price Movement

"I expect the next big rally to begin no later than mid-August, and likely at the beginning of August or even late-July," says Nielson of http://www.bullionbullscanada.com.

Morgan expects the rally in the fourth quarter of this year. As far as targets go, Morgan feels, in the medium term, silver should touch at least $45 per ounce (around Rs 68,000 per kg); in the long term, it should touch around $100 per ounce (around Rs 2 lakh per kg). Silver, therefore, still is a good investment bet.

***

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