Is Silver Detaching Itself as ‘Money’? — The Silver Supply is Shrinking
Well, well, well.
I have never been so disappointed.
Here I was thinking I was challenging long-held conventional thinking, and nothing. Nada. Not one outraged email. Not even a whimper.
Here I was prepping our customer service team, warning that I was expecting a flood of angry emails from silver investors.
See, you don’t mess with silver investors. They are a passionate bunch. In the past when I’ve neglected to write about the other precious metal, they’ve pointed it out. When I haven’t talked about silver’s ‘incredible upside’, I get the odd angry email telling me I’m failing investors.
Here I was last week telling my silver brethren to brace for limited gains in the silver price.
And guess what? Crickets.
The customer service inbox was about as dry as my DMs.
The lack of angry emails was a surprise, so much so that one contact of mine pointed out ‘perhaps maybe your readership are mostly gold investors’.
But, if we were out sharing a beer (in Melbourne we can now!), I’d tell you that I wasn’t done making my point.
However, I need to expand on this just a little. The problem is the silver price just can’t go too high…
Silver supply is shrinking
Months of lockdown, with nothing but the kids and dog for company — and a dodgy internet connection until Telstra gets a bloke out — have given me time to think.
And much of that was around what’s ahead for gold and silver.
As I said seven days ago, there are lots of arguments to suggest why silver should rise drastically.
Perhaps a key reason the silver price should rise, is that not enough of the stuff is coming out of the ground.
In fact, over the past decade, less of the white metal is being mined.
There’s been a 36% decline in ore grades from the world’s 12 largest silver miners. Meaning with every tonne of earth dug up, there’s less and less silver in it.
Not only that, but with the silver price being in a slumber for many years, mining companies did what’s called ‘high grading’. That is while the price was low, they were forced to mine the highest-grade ore to cover costs.
What that means is, as miners dig away at their best stuff, it leaves the lesser grade stuff in the grade. Ideally to be mined at a higher price in the future.
And with silver getting a kick to the price this year, it does incentivise the miners to move to some of the lower grade stuff. But that means there’s a lower quality of ore coming out. And sometimes, a lot of this lower quality silver is only profitable when mined with the higher stuff.
This compounds the problem, as it reduces how much silver finds its way to the market.
At the same time, the reserve base of silver has fallen significantly.
This is a reduction in supply from every angle.
Surely that should boost the silver price…
Technically speaking, a shrinking supply of an already rare good, increases its scarcity, and the price should rise. That’s how market works, right?
True, that’s how most markets work. But not the silver one…
The cure for high prices…is high prices
Do you remember when the copper price shot through the roof in the aftermath of the financial crisis? After a catastrophic dip down, copper doubled through to 2011.
I remember this time well. Electricians working on large construction projects around Melbourne were starting to stock stockpile left over copper into their toolboxes. Or stuff it in the boot. Then they’d go home and spend hours stripping off the rubber coating. Take it down to their local scrap dealer and end up with a few hundys for their time.
Some blokes saved the extra cash. Others would get together and ‘pool’ their scrap copper money and throw some decent parties for all the blokes and their families.
Incidentally, this scraping of copper cabling led to a few new rules around left material on construction sites.
By the way, I recently spoke with Rick Rule on all things commodities (watch it here). The days of average Joe scrapping copper might be a thing of the past.
But that’s the thing with high prices. People will find ways to extract value from products as their prices rise.
And this is something to keep in mind with the silver price. The higher it goes, the more of an incentive there is to scrap it.
The white metal already has a thriving scrap market. Around 20% of the supply of silver today comes from the scrap market. Back in 2012, when the price spiked to US$50, the scrap supply jumped to 25%. Simply put, the cure for a higher silver price, is a high silver price.
While I do expect the silver price will rise, silver is so crucial to our lifestyle the price can’t move too high without driving up the cost of goods. Possibly to a point where people wouldn’t even buy them anymore…
More to the point, the lack of silver grades comes at a time where we are increasing our consuming of silver. Which is likely to see more scrap silver come into the market. It’s likely it will fill the supply gap, as it has for the past decade.
Silver is a superior electrical conductor to copper. Yet copper is far cheaper to use because of the sheer volume of how much is needed. We tolerate the slightly-reduced speed of electrical signals for the cheaper good.
But our tech-heavy future requires faster transfer of information. One of the few things that will enable data and electrical signals to move faster, is applying silver in certain parts to speed it up.
Already silver is being used to coat copper cables in parts. This reduces voltage drops as well as speeding the signals up.
Going forward we need increasingly vast amounts of data transferred through. Not less.
In the past few millennia, silver has moved from being the only money that matters, to perhaps the only commodity that more of is needed in the future.
The industrialisation of silver is decreasing its role as money. In other words, it’s effectively being demonetised.
It’s not that silver isn’t valuable. The problem is that its utility is now more important than its historical role as money.
Until next time,
Editor, The Daily Reckoning Australia
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