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TORONTO (GlobeinvestorGOLD)—It seems the only time we hear about the silver market is when we're already talking about the gold market. Most of us know the Lone Ranger's horse was Silver, and only a silver bullet will kill a werewolf, but there are other unique market factors that put silver in a volatile class by itself. The right combination of them could spark a silver rally—or bring the market crashing down.
Of all the metals, silver is the best conductor of electricity (gold is also good, and is more resistant to corrosion). Twenty-eight per cent the world's silver is used in photographic paper and film, including medical and dental X-rays. Twenty-five per cent is used in jewelry and electronics such as connectors, contacts, and batteries. In some cases, silver is used in the water-filtration process because of its ability to kill bacteria cleanly. But the largest portion of the world's supply is in the form of currency, which brings us to its other function—a hedge.
Silver prices tend to move in tandem with gold when investors are looking for a haven from equities, especially during bear markets such as this one or in times of high inflation. But the similarities end there. In the past five years, silver has fallen from as much as $7 an ounce to under $5, while gold has risen over the same time period from $300 to more than $360. Price graphs show wild deviations between silver and gold, which are the result of peculiar supply-and-demand forces on silver. (Skip charts.)
Right now, demand is mixed. On the upside, the popularity of cordless power tools has battery manufacturers boosting their silver orders. Because it's the best conductor of electricity, patents are filed every week with the U.S. Patent Office outlining new uses for silver.
Any increases in demand, however, could be offset in the age of digital photography. More and more photographers—especially in the retail market—are trashing their film canisters in favour of a more convenient disc that doesn't require silver.
Demand for silver has exceeded the mine supply for more than a decade by 100 to 150 million ounces a year. On the supply side, very little silver is actually mined. About 70 per cent of the silver that is mined comes as a byproduct of other mining ventures, including explorations for gold, copper and zinc.
In most cases, miners find silver when they're looking for something else, which allows little control over supply. Because it's not the primary resource, producers often sell the silver on the spot market and use the money to fund their primary mining operations. The practice puts downward pressure on silver prices, since producers accept the going price.
This supply-side deficit is what makes silver so peculiar. In the silver market, supply is decreasing, demand is increasing, and the long-term price is falling. No other commodity defies the laws of supply and demand like silver. David Morgan, a silver analyst with Silver-investor.com, blames the phenomenon on the huge short positions in the silver market. He says there is more silver on paper than actually exists in the world. "It is a pathetically small market and is dwindling all the time" he says. He adds that if big silver investors like Warren Buffett, George Soros, and Bill Gates decided to double their positions, there would not be enough silver to fill the order—and the market would collapse. He says the threat is compounded as investors start to lose faith in the U.S. dollar and look for hard assets.
Most commodity positions, however, never result in the buyer taking delivery, and the jury is still out on exactly how much tangible silver actually exists. Rough estimates have pegged the world supply at between 300 million and a billion ounces. Since silver is a consumable item, that number is expected to be falling.
Still, if the facts are right, a spike in demand could lead to mass default. David Morgan says regulators are not taking the threat seriously enough. He suggests regulators step up to the plate and place limits on purchases for buyers not using the silver for manufacturing. So there's plenty to fear in the silver market, and it's more than just werewolves.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.