Anyone who took any notice of MoneyWeek’s advice to buy silver a few years ago when it was loitering at around $4 dollars an ounce would have been pretty pleased with themselves in April, when the price touched a 16-year high of $8.49. Sadly, since then it has fallen back to around $5.60 – I imagine they are now kicking themselves for not banking their profits then. However, they should take heart: not only have they made a good 40% out of the trade, but even now there is a good chance that they will get another bite at the cherry.
The fundamentals of the silver market remain excellent. I have just received this year’s World Silver Survey (done every year for the Silver Institute by precious metals research firm GFMS) and it makes for happy reading. Last year was the 15th year in a row that demand outstripped new supply. That means inventories are still being depleted, a trend that is going to continue for very simple reasons. Low prices have discouraged new exploration and production. So supply remains very tight indeed (it takes anywhere from five to 15 years to get a new silver mine up and running, so mine production in 2003 was more or less the same as in 2002). One other thing to point out on the supply side is that much of the current shortfall in the silver market is made up by Chinese government sales (China has a lot of silver left over from the days when it operated a silver standard). Total government sales came in at around 80 million ounces last year, and the report suggests nearly 70% of that comes from China. That can’t last. Philip Klapwijk, the executive chairman of GFMS, guesses that China has only two to three years’ worth of that kind of supply left. Given this, a static supply of silver over the coming years looks rather like a best-case scenario. If Klapwijk is right, supply will start to fall.
Yet demand is likely to remain steady. Unlike the demand for gold, which is closely linked to inflation and misery (see page 8) and so held mainly by the scared and the speculative (which includes me, as regular readers will know), silver is not just a hedge against economic disaster. Alongside jewellery and photographic use, the metal also has a huge number of industrial applications: it is used in almost every electrical component you can think of (hence the news that China consumed a record 27.6 million ounces of it last year). All this suggests to me that the silver price will soon rise significantly again. And I’m not alone. According to Barron’s, silver producer Silver Standard Resources is using its spare cash to buy other people’s silver on the open market. Why? Because its president thinks the price of silver will “go higher”. He should know.