If you take a look at this chart published by Kitco Metals Inc, which shows the price of silver over a 20 year period from 1985 to 2015, you may well draw the conclusion that most investors who have been exposed to the metal for this period of time, might feel slightly underwhelmed by what they have achieved in terms of returns.
The problem with statistics as we are so often told by someone quoting that notorious saying that “there are three ways not to tell the truth, lies, damned lies and statistics” , is that the information can be used to support conclusions that may not truly represent the real position.
There is no disputing that the price of silver enjoyed a bull run and according to prices, the party’s over. But what the silver price isn’t really telling you just yet, is how strong industrial demand is right now and how it is expected to grow in the future.
What drives prices?
The price of silver in recent years and its steep rise over a two year period which is demonstrated in the chart, has almost exclusively been driven by investment factors and monetary demands rather than as a reflection of strong industrial demand.
If you delve into the past and take a seventy year period starting from 1900, the industrial and technological revolutions that took place during this time in our history led to a four-fold increase in demand for silver, rising from 100 million ounces to 400 million ounces.
Silver was considered the go-to metal and found uses in a wide range of new inventions and products that became consumer essentials. You can find examples of silver being used in an industrial capacity for things as diverse as plumbing, cars and electricity generation.
Fast-forward to the present day and industrial demand for silver is somewhere between 500-700 million ounces, compared to 400 million ounces in the 1970’s. This is the point in the story of silver in an industrial capacity starts to get very interesting, as far as some investors are concerned.
Whole new industries have been created such as solar energy, which uses silver paste in a very high percentage of crystalline silicon photovoltaic cells and the electronics industry is a heavy user of silver in many of its manufacturing processes.
Due to the wide use of silver in industrial applications and the fact that the list of uses is growing as developments continue in areas like nanotechnology, some experts believe there is a possibility to add a further 80 to 10 million ounces of silver demand to existing figures.
If that is the case and above-ground silver stockpiles become depleted, there is certainly a case to be made for suggesting that the price of silver will react accordingly.
Present and future uses
To get a feel of how accurate these predictions of a significant rise in demand for silver actually are, it is worth taking a look at how integral silver is in our daily lives as consumers.
This table published by the Silver Institute details the levels of supply and demand over the last decade and which industries and sectors are demonstrating the largest volumes of usage.
Silver is considered is widely considered to be a more versatile industrial metal than copper and every typical household is testament to that claim as you will find silver in your alarm clock, the power switch on your wall and it is found in your plumbing, water purifier, computer,cellular phone and even your iPad, amongst other things.
Many gadgets that we use on a daily basis need batteries and these batteries need silver for their cathode or negative side. Silver oxide cells are used in cameras, electronic kids toys and if you wear a hearing aid, that will also be using silver oxide cells, which are gaining increasing popularity as they are considered to be more environmentally-friendly than lithium-ion batteries.
An interesting future development, might be where we see silver replace copper for as the primary form of electricity wiring. Copper is widely used for this purpose currently, mainly because it is considerably cheaper than silver per ounce.
Whilst cost is obvious a key consideration, it is worth pointing out that silver is a far superior conductor of electricity and performs consistently well at virtually any temperature, which also makes it versatile.
Already in the U.S, HTS wiring is gaining credence and that is perfectly understandable when you discover that it is capable of carrying 140 times more current than its copper equivalent and is also believed that HTS wiring is also more resistant to power surges.
Improving our health
Another industrial application where silver is expected to an increasing level of demand, is water purification systems.
Developments in these systems now see silver being used as a viable and safer alternative to toxic chemicals like chlorine and bromine. Swimming pools and spas are now able to use silver ion canisters to spread a biocide blanket, which is able to help prevent the prospect of diseased water.
Nanotechnology is another interesting area of industrial development, and with regard to making food-processing cleaner and healthier, it is now possible to impregnate silver into plastic sheets as a way of ensuring that bacteria does not affect the food.
Why manufacturers favor silver
Engineers are strongly in favor of selecting silver as their metal of choice, simply because nothing else is able to offer the same electrical or thermal conductivity or reflectivity.
It is hard to argue with the observation that silver is virtually irreplaceable and a vital industrial component as we continue to develop more efficient electronic products and more people switch to solar power generation and therefore need the photo-voltaic panels which rely on silver.
The medical industry utilises silver as a biocide and as silver catalysts expedite the reactions needed in order to produce major industrial compounds like formaldehyde and ethylene oxide, it is very hard to envisage the demand for silver falling or finding a replacement.
This dependence on silver is entwined within many major industries and when you consider situations like the rapid growth in uptake of solar installations, the 40 million ounces of silver used in the production of photovoltaic panels in 2013, is a figure that will be dwarfed in future years if the expected surge in demand continues.
The big picture
The Silver Institute publishes its annual Outlook for New Electronic and Electrical Uses of Silver and it predicts that we will witness 6% growth in demand in 2015 and the same in 2016, which equates to an additional 14 million of ounces of additional annual demand.
Some analysts also believe that growth in other industrial applications could easily add a similar amount of demand, which means that overall growth in industrial demand has a fair chance of outpacing GDP growth by some margin, if the estimates are reasonably accurate.
When looking at silver as an investment, simply reviewing its role as a monetary metal and basing your decision on whether to add some exposure to your portfolio on that basis, is not looking at the bigger picture.
Silver investors definitely need to factor a growing number of industrial applications into the equation, and if we get to a point where demand is starting to threaten a potential supply shortage, that could potentially have a profound effect on an asset which is also popular not just from an industrial perspective, but also to millions of retail investors who use silver as an investment hedge.
This is in no way a prediction that silver prices are going to rocket anytime soon but when you consider the level of panic induced by a fear of a palladium shortage in 2000, the market response would be very interesting to note.
Palladium is an industrial metal relatively low investor interest when compared to silver, but when the Ford Motor Company feared a shortage as a result of supply disruptions in Russia, the price of palladium tripled in a very short space of time.
If a similar scenario occurred with silver, it is not beyonds the realms of reasonable thinking to suggest that we could witness a far greater price spike, especially when you consider the prominent role silver plays in industry.
Even if supply continues to keep up with demand, it is still possible to construct a reasonable argument that silver is set to enjoy a shiny future when you consider the increasing levels of industrial demand and the introduction of new technologies that make use of the metal.