After a shocking upward climb to nearly $50 an ounce, silver prices have been walloped over the past two days - plunging to $41.50 an ounce in afternoon trading yesterday (Tuesday).
But regardless of this sharp decline, now isn't the time to panic. After all, the U.S. Federal Reserve has given no indication that it plans to tighten monetary policy anytime soon, and as a result the dollar continues to weaken.
That bodes well for all precious metals, which serve well as a store of value. Furthermore, silver has another trump card - its widespread use in industry and manufacturing.
Ask most people on the street to name the primary thing silver is used for and they'll reply, "coins and jewelry."
Of course, silver is used for both of those things. But coins and jewelry combined barely accounted for 30% of "fabricated" silver products in 2010 -- and less than 25% of total silver demand.
Indeed, it was industrial use that accounted for the bulk of silver fabrication demand in 2010 - 487.4 million ounces, up from 403.8 million ounces in 2009. That compares to just 167.0 million ounces for jewelry and 101.3 million ounces for coins. Other major usage categories are photography (72.7 million ounces), and silverware (50.3 million ounces).
That annual increase of 20.7% in industrial use reflects a steady rise in demand stretching back to 2001, interrupted only by a brief recession-induced dip in 2009.
Demand also increased for silver use in coins (22.0%) and in jewelry (5.1%) last year, although it declined in photography (down 8.3%), a reflection of the continued shift from film to digital cameras.
Overall, demand for all fabricated silver rose 12.78%, and total silver demand jumped 14.59%.
Given the dramatic surge in industrial demand, the two key questions for silver investors are:
- Exactly what is silver used for industrially; and
- Can we expect the growth in demand to continue?
Let me answer those questions.
The Driving Force Behind Silver Prices
Taking the second question first, whether we can expect the growth in demand to continue, the answer is a definite "yes."
Silver has a number of unique physical properties that make it almost impossible to substitute in the many industrial applications in which it is used:
- It's strong, yet highly malleable, so can be shaped into many forms.
- It's very ductile, capable of being stretched into silver wire - or even silver thread.
- It has natural anti-bacterial properties, making it useful for such things as medical instruments and as a connecting agent in places where contamination can be a problem, such as joints in household copper piping.
- It's a highly efficient electrical and thermal conductor, making it ideal for all types of circuits and connections.
- Because it conducts rather than absorbs heat, it can endure extreme temperature ranges without degrading or suffering cellular damage. This makes it a superb soldering agent for joints that experience rapid expansion and contraction due to alternating heat and cold.
- It has a high sensitivity to light, yet is also an excellent reflector.
- Humans generally find it attractive, giving it broad appeal for ornamental uses.
These properties make silver virtually indispensable in a number of industrial processes and products, including:
Batteries - Perhaps the most common modern industrial use of silver, simply because almost everything these days requires a battery of some sort, with the majority - from pacemakers and hearing aids to cell phones, cameras, calculators and even toys - using the small, button-shaped silver-oxide cells. Concerns about pollution and overheating also are leading to the replacement of larger lithium-ion and other older battery types with silver-zinc units. This means demand for silver in this sector will steadily increase, since roughly 35% of these batteries (by weight) consists of the white metal.
Chemical production - Silver serves as an ideal catalyst in a number of chemical reactions, including the production of ethylene oxide and formaldehyde compounds, both of which are required to manufacture various plastics, especially those requiring heat resistance. Products using these compounds include stove handles, computer keys, appliance parts, heating system control knobs, adhesives, laminating resins, auto parts and even anti-freeze and polyester textiles used for clothing. The list is almost endless - and it required roughly 22.5 million ounces of silver in 2010 alone.
Bearings - If you've taken an airplane trip lately, be thankful for silver because jet engines wouldn't work nearly as well without it. The steel ball bearings they require last far longer and turn far more smoothly when they're coated with silver, which reduces friction, lowers metal fatigue and prevents breakdown due to prolonged heat exposure. Silver-coated bearings are also used in many other heavy-duty mechanical applications, such as oil pumps.
Electronics - Because of its exceptional electrical conductivity, silver is widely used in all types of electronics products, from printed circuit boards to plasma TV screens and computer monitors. Highly reliable silver-membrane switches are used in everything from phones and TVs to toys and household appliances. Silver coatings are also used on most CDs and DVDs.
Soldering and brazing - Silver's resistance to temperature extremes makes it an ideal agent for joining low-pressure pipes and other materials subject to rapid expansion and contraction due to exposure to heat and cold. Silver soldering, the joining of metals at temperatures below 600 degrees Celsius, and brazing, used at temperatures above that level, is used extensively in the automobile and aerospace industries, as well as in air-conditioning and refrigeration systems and power distribution. Environmental concerns will ensure continued high demand in this area since many countries have banned the use of once-popular lead-based soldering compounds.
Mirrors and coatings - Silver has been used in mirrors for centuries, but its polished sheen and reflective abilities are making it increasingly popular for use in energy-saving windows. Silver-coated double-paned windows are said to reflect more than 90% of the heat of the sun's rays, which helps explain why more than 250 million square feet of the glass was used last year in the U.S. alone.
Optics - The same light-sensitive and reflective properties that make silver useful in windows put it in high demand for eyeglass lenses. Silver-coated sunglass lenses can change from light to dark in under a minute - blocking just 22% of light in dim conditions up to 96% in bright sun. They also block up to 97% of the sun's harmful ultraviolet light.
Paints - While putting silver in paint helps protect the covered surface, the main value derived from doing so relates to silver's anti-bacterial properties. Silver paint mixtures keep the painted surface germ and fungus free, making it ideal for use in hospitals and other medical facilities, food and beverage plants, schools, prisons and other places where bacteria can grow and threaten health.
Musical instruments - Some musical instruments - particularly woodwinds like flutes and piccolos - simply sound better when made with silver and silver alloys.
Medical - Silver's anti-bacterial properties make it useful in all sorts of medical applications, from hospital fixtures to surgical instruments. It helps prevent the spread of germs, particularly the drug-resistant "superbug" MRSA, a potentially fatal Staph infection. Apparently silver destroys a bacterial cell's ability to bond to surfaces, causing it to literally fall apart. New products taking advantage of this silver property are being developed almost daily - some involving the delivery of germ-fighting silver mini-beads in the body using nano-particles - with great promise shown in many areas, such as treatment of burns and open wounds. Silver also continues to be an essential component in medical X-ray films.
Dentistry - Silver is used in alloy with other metals to make amalgams for dental fillings. Silver's malleability helps in molding fillings that match surrounding teeth, and its strength protects against new damage when chewing.
In addition to the more-established applications that use silver, the metal is in growing demand in several other areas where growth is virtually assured thanks to environmental issues and the needs of a burgeoning global population.
Two particular areas of increasing demand are:
Solar energy - Silver paste is used in up to 90% of crystalline silicon photovoltaic cells, the most common type used in both private and commercial solar-power systems. Silver is also used to reflect and concentrate light in nearly all solar-collecting surfaces, including those used to generate power by boiling water to drive steam-turbine generators. More and more buildings are being designed or refitted to make them solar-reliant.
Water purification - The greatest need of the growing global population will most likely turn out to be clean water, with adequate sanitation systems a close second. Because of its germ-fighting ability, silver is increasingly being used in water- and sewage-treatment systems, and also as a replacement for sometimes harmful chemicals used in treating water in air conditioners, pools, spas and other water-intensive systems.
Given its unique properties and uses, there's little question that industrial demand for silver will continue to steadily climb, and the potential for associated price increases will also keep investment demand on the rise - or, at the very least, provide a cushion against price pullbacks that might threaten investment profits.
In fact, there are really only two potential factors that could stall silver's price advance:
Recycling - Because the white metal is virtually indestructible and easily reprocessed for new uses, silver recycling is a rapidly growing industry, with used X-ray and photographic film, old jewelry and fabrication wastes providing the bulk of reusable silver.
Increased mining - Although silver is relatively scarce, it is still the most plentiful of the precious metals - which helps explain why, even with the recent price increases, it remains the least expensive. Silver can be mined directly, and is often retrieved as a byproduct of the mining of gold, copper, lead and zinc. Mine production of silver totaled 735.9 million ounces in 2010, up 2.5% from 2009, with Mexico moving ahead of Peru as the world's No. 1 silver producer (128.6 million ounces). Several new silver discoveries were announced in 2010, including a particularly rich find in Argentina, which could help that country move up from its No. 10 spot on the production list.
There's also a significant supply of silver bullion currently being held by industrial users and investors - perhaps as much as 1 billion ounces - that could be converted to industrial use if needed.
Still, there seems little likelihood we'll see $5.00 an ounce silver again - which is where the metal was priced in late 2003 - or even the $18.00 an ounce price we had in August 2010 when the current rally got under way.
If you haven't yet made an investment in silver, a few opportunities still remain.
Many of the mining company stocks have lagged the increase in the price of silver itself. That includes Silver Wheaton Corp. (NSYE: SLW), recent price $34.95, and Pan American Silver Corp. (Nasdaq: PAAS), recent price $33.68.
Another way to make a long-term silver play might be to focus on the recycling sector - except there are no major publicly traded silver recycling companies.
However, Australian-based Sims Metal Management Ltd. (NYSE ADR: SMS), recent price $19.18, operates internationally and one of its divisions focuses on recycling electronics products, retrieving a considerable amount of silver in the process. With recycling a major growth industry, it stands to benefit even if silver's rally stalls - and it already has earnings of 73 cents a share, with a dividend of 33 cents, good for a 1.72% yield.
News and Related Story Links:
- Money Morning:
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Encyclopedia entry: Federal Reserve System
Encyclopedia entry: Silver
Encyclopedia entry: Fabrication (metal)
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- The Silver Institute:
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- Northwest Territorial Mint:
- Yahoo! Finance:
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- Mining Weekly:
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- Gold Alert:
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