Silver 1: The Roles of Silver

Rebecca Ridolfo, July 2015
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Contents

  1. Uses of Silver
  2. Industrial Silver
  3. Scrap & Mining Supply
  4. Investment Silver
  5. Sources

Uses of Silver

Silver is directly relevant to anyone who uses electronics, packaging, jewellery & cars. Silver is financially relevant to anyone who has a pension, a mortgage or insurance. Modern Portfolio Theory recommends putting about 10% of holdings into precious metals, so underlying funds have exposure to it, directly or indirectly. [Covel]

Silver is connected to many industrial & construction processes – ethylene oxide is used to make detergents, solvents, coolants & other chemicals, for example. In the future, silver has the potential to revolutionize health & electricity generation and, broadly, reduce society's costs & environmental impact.

Silver is the world's most versatile metal, has the highest electrical conductivity of any element and the highest thermal conductivity & reflectivity of any metal. It is a "transition metal", with an atomic weight of 47. Its symbol is Ag, from the Latin argentum. It is measured in Troy ounces of 31.1grams.

Silver use is tripartite – industrial, decorative (jewellery, tableware & artworks) and investment. In 2013, physical silver demand was 586.6 million ounces (54.3%) for industrial uses, 248.8 mOz (23%) for decorative uses and 245.6 mOz (22.7%) for investment. Silver Institute

Industrial Silver

Silver's conductivity means that 233.9mOz [million ounces] were used in electronics (including switches, multi-layer ceramic capacitors, conductive adhesives, contacts and as a coating material for optical data-storage media). Brazing alloys & solders used 62.4mOz. Silver is used in film photography and, although digital has reduced the market by about 70%, photos still took up 50.4mOz in 2013. A further 240mOz were used in “other” industry, bringing the total to 586.6 mOz. This grew to 594.9 mOz in 2014. Silver Institute

Solar – Silver is a primary ingredient in crystalline silicon photovoltaic cells (the most common type) and 70mOz are projected for solar energy use by 2016. "China raised its target for solar generating capacity to more than 35 gigawatts (GW) by 2015, a stunning increase of 67% above the previous target. … The country's previous target was 21GW; installed capacity in 2012 was about 7GW, so this would translate into a 400% increase." Market Oracle A recent research breakthrough has created a design that improves yields by about 30%. [Open University]

Medical – The use of silver in medicine is at least as old as Hippocrates & the Phoenicians. Silver promotes new cell growth in humans by reflecting & channelling electrical energy. Luckily, on the microscopic scale, that level of electricity interrupts bacteria's ability to form chemical bonds and they literally fall apart. Even antibiotic-resistant superbugs like MRSA succumb to silver, so it is used to make or coat surgical instruments, needles, tubing, bandages, hospital door-handles, light switches, files … [PennState University]

Filters – Silver removes chlorine, trihalomethanes & lead and prevents bacteria & algae from building up, diminishing everything from odours to Legionnaire's disease.

Glazing – A transparent coating of silver on glass creates thermal windows, which reflect up to 95% of the hot summer sunshine outwards, keeping air-con bills low. "Over 250 million square feet of silver-coated glass are used in homes in the USA each year." Also, silver-coated polyester sheets can be used to convert existing windows to thermal efficiency.

Nanoscale silver particles are used in pigments, catalysts, glazing, packaging, wound treatment and as a biocide. Recently, scientists have discovered a way to weave them into clothig that reflects its wearer's body-heat back inwards, with the potential to reduce illness, heating costs & electricity demand.

The demand for solar power is growing exponentially. Given half a chance, nanosilver technologies will change our world for the better – clothing that keeps you warm, glazing that keeps you cool & filters for water. Medical silver is going to be very important in the Post-Antibiotic world. "China consumes almost half the world's antibiotics – and they're coursing through its waterways." SCMP The growth of antibiotic-resistant infections is starting to really worry doctors. Factories dump waste carelessly (Chinese rivers are "antibiotic soup"), farm animals are pumped full of them and people take them carelessly & for all kinds of non-bacterial illnesses.

I did an online course wit Penn State University called Epidemics – the dynamics of infectious diseases. The lecturers' body language changed when they started discussing the prospect of antibiotics being useless within, perhaps, 20 years. The mixed messages reminded me of someone hiding behind the sofa, watching a horror movie between spread fingers, unable to look or look away. As far as I'm aware, silver is the only thing that comes close to being an alternative. As long as there are people, they will get sick sometimes and there will always be a use for silver. As pension plans go …

Scrap & Mining Supply

Most industrial silver is unrecoverable as scrap. Each mobile phone might have just a gramme or so in its wiring and it's not worth trying to recover (person-hours per handset), but that really adds up across millions of phones. You can't get silver back from photographs or packaging or industrial processes. The stockpile is going down every year.

Silver comes out of the ground at a ratio of about 9 ounces to every ounce of gold mined. More than half of silver mined is a by-product of mining other metals, such as copper, zinc, lead & gold. Taking into account mine production, scrap reclamation, govt sales & net hedging supply, the total 2013 supply was 978.1mOz, a shortfall of 102.9mOz relative to the 1,081mOz demand. From 2004 to 2013, there has been an annual shortfall in the net balance, ranging between 7.7 & 265.2 mOz. As you will see, that situation has got worse rather than better. Silver Institute

"For the past 30 years, the world has used up more silver than has been mined and, today, silver inventories are near all-time record low levels." SilverMinesLtd

Investment Silver

Investment silver is seen as money, a safe haven, an indicator, a commodity & a basis for derivatives. Gold & silver are an ancestral form of money – recognisable, durable, portable, fungible (divisible), rare & very hard to counterfeit. They are the traditional destination in the "flight to quality" – "The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This flight is usually caused by uncertainty in the financial or international markets." Investopedia As such they are seen as a key financial indicator, inversely correlated to fiat currencies. Conventionally, when trust in fiat currencies is high, the prices of gold & silver are low and vice versa.

Silver & gold are also commodities traded on the CoMEx, LBMA & SGE. Silver is a basis for derivatives – "A security whose price is dependent upon or derived from one or more underlying assets." Investopedia In the early 1990s, I worked for BZW, editing & DTPing their derivatives research. At the time, derivatives were a fairly new concept and generally agreed to be intricate & complex. They were originally designed for corporate finance. Say your corporation has 2-year Yen debt at 5% and you wanted to change that to 5-year Euro debt at 2%, then you could do that by creating derivatives. If you want to buy a supply of a raw material in a particular currency at a particular date in the future, you can hedge yourself against price & exchange rate fluctuations by creating derivatives. They soon began to be used in order to speculate and day-trade, to gamble on the numbers without reference to the underlying economic activity, to place bets on bets on bets.

Although silver derivatives must be based on an underlying physical commodity, they are leveraged so that numerous ounces of derivative silver can be sold for every underlying ounce of real metal. Even with the best will in the world and perfect market transparency (which is not the case), the leverage is difficult to calculate. One would have to be accurate about the world stockpile of silver and the quantity of silver-based derivatives. Considering how many market participants there are, both are extremely difficult to inventory and constantly changing.

Estimating from the 2013 physical supply of 978.1mOz and the 200-day moving average of $28.20 (as of mid-July 2015), a year's trading in the physical market is roughly $27.6 billion. Estimates of last year's derivatives trading volume range between $1,000 & $5,000 trillion (yup, that's trillions) and estimates of the ratio are between 36, 75 & 100+ ounces of paper silver to every ounce of bullion.

go to Part 2

Sources

The Silver Institute website home

Trend Following - how great traders make millions in up or down markets Michael Covel, 2004 Covel's podcasts

MarketOracle article

Elements of Renewable Energy, Open University

Epidemics - the dynamics of infectious diseases, PennState University

South China Morning Post article

SilverMinesLtd article

Investopedia dictionary

The (Mis)Behaviour of Markets - a fractal view of risk, ruin and reward Benoit B Mandelbrot, 2004

 

Give feedback, make suggestions and report errors at rebeccaridolfo@gmail.com

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