Serpo
9th May 2010, 07:07 PM
The Silver Price Spiral Part III: Tomorrow
06/05/2010
Jeff Nielson
May 3, 2010
In Part I of this series, I introduced readers to the idea that the price of silver could soar to levels which would even surprise most silver-bulls. In Part II of this series, I pointed out that when our "paper inventories" of silver are exposed that this, alone, sets up the silver market for an enormous price-shock. In Part III of this series, I will discuss how silver has perhaps the most-bullish demand fundamentals of any commodity in history.
As I stated at the beginning of this series, a "three-digit price" for silver is assured, while over the long term, that price could rise close to, or above the $1000/oz-mark...but I am getting ahead of myself. This series is all about studying the dynamics of the silver market, so what I will focus on is what we can expect to happen in the silver market (on the demand side) as silver rises to, and then above $100/oz.
The first general point to make about the market for any commodity (or any "goods") is that markets typically have a "self-correcting" mechanism for when supply and demand are badly out of balance. If supply greatly exceeds demand, prices typically fall until demand is stimulated enough by the falling price to equal supply. Conversely, when demand grossly exceeds supply, prices rise - until that rise in price either discourages demand, or encourages new "supplies" to come onto the market to create an equilibrium.
What has gotten me so excited about silver is that such "self-correcting mechanisms" are almost totally absent from the silver market. As I have already discussed on the supply-side, a quadrupling of the price of silver has resulted in a very muted supply-response. This suggests one of two scenarios: either we have already reached some sort of "peak silver" equation (where supply cannot be ramped-up dramatically - at any price-level), or else silver simply needs to rise to a much higher price to begin to lead to increased mine supply.
The other component of supply which we cannot ignore is the "scrap market". With silver having been mined for nearly 5,000 years (along with gold), at one time there were enormous global "stockpiles" of silver - silver that is either stored/held by governments, or hoarded by private entities. However, according to the research of noted silver authority, Ted Butler, somewhere around 90% of those stockpiles have been "consumed" over the last 50 years. Thus, no matter how high the price of silver goes, we cannot see any major growth in supply from "scrap sales", simply because that silver is already gone.
It's now time to examine demand more closely, and what we find here is that as with supply, there is no self-correcting mechanism to moderate the price of silver as it moves higher and higher. In economics, when we talk about supply or demand, we refer to the concept of "elasticity". Goods which respond dramatically to changes in price are said to be very "elastic" with respect to price. Goods where price-changes cause little change in demand are said to be very "inelastic".
In the case of silver, we are very possibly looking at the most inelastic demand of any commodity which is broadly used/traded in our economies. In other words, even extreme rises in the price of silver will have only a very modest impact on demand. There are two, totally separate reasons why demand for silver is more inelastic than that for any other commodity.
First of all, as I mentioned in Part I (and discuss frequently), silver is not only the most versatile of all metals, but with several of its chemical/metallurgical properties it is essentially unique - meaning that there are no "substitutes" which are available to replace it. Similarly, with some of its properties it is so much superior to other metals that it is effectively irreplaceable.
In the first category is silver's use as an anti-bacterial agent. Silver is unique in possessing chemical properties which make it impossible for bacteria to reproduce. There are two extraordinary implications for this chemical property. First of all, it is impossible for bacteria to ever develop "immunity" to silver anti-bacterial products - unless they literally evolved into a new species (a process generally requiring at least thousands of years).
This means that our health-care systems can use existing products (and develop an infinite amount of new anti-bacterial products) without any fear of such capital expenditures being rendered obsolete/ineffective. And because this is a chemical property unique to silver, there is no possibility of any other commodity being substituted for it - at any price.
At a time when silver inventories are virtually gone, we have a new application for silver (in its very infancy) where there are a virtually infinite number of potential applications, which are certain to remain in demand for centuries (and likely longer) and where there is no possible substitute for silver. As an example of the demand-pressures on silver from this one application, I saw an interesting article on a U.S. government initiative to punish U.S. hospitals which have high levels of deaths/injuries from "medical mistakes" and "preventable" causes. "Preventable re-admissions" alone cost the U.S. health-care system $25 billion/year.
With the entire U.S. medical system being crushed by the burden of totally unsustainable costs, no hospital can afford to be "punished" for poor safety/quality of care, and at the top-of-the-list among "preventable" conditions are the vast number of "secondary" bacterial infections which are epidemic in hospitals all over the world.
As an example of this enormous carnage in our hospitals, 30,000 Americans die every year just from "catheter-related blood stream infections". While I lack the medical expertise to conclude that this problem could be solved or abated with some sort of "silver catheter" being used, given the vast array of silver anti-bacterial products already created, a "silver catheter" would seem to be a very straightforward innovation.
A great place for investors to learn about some of these uses is at The Silver Institute. Searching through its "news" and "uses" sections will give people a general idea of the extraordinary range of possibilities in this single application. I lack the space to even summarize all the uses which have either already been developed, or are being currently researched.
Instead, I will simply speak of the one, particular use which immediately caught my attention when I first heard about it: silver upholstery. It would already seem to be a "done deal" that we will see silver-upholstery being used for all furnishings in hospitals. In addition to formal "pressure" being exerted on hospitals to reduce preventable infections (i.e. the new U.S. initiative), potential legal liability for any hospital which does not utilize this innovation will likely be a much stronger factor in compelling hospitals to act.
Consider how the issue of "liability" operates in our legal system. While the number of "preventable deaths" in our hospitals is atrocious (more than 10,000 Canadians die every year as a result of "medical mistakes"), holding hospitals and medical personnel responsible for these deaths hinges on whether there were/are any practical alternatives to prevent the "harm" in question. If merely choosing a different fabric for furnishings could potentially reduce such bacterial infections (and deaths), this is a "practical alternative" which our courts would not hesitate to impose on our health-care systems...and the day after hospitals begin to systematically switch to silver furnishings, there will be lawyers looking for new avenues of "liability" in this regard.
The next likely "targets" to face pressure to switch to silver upholstery would be every doctor's office and medical clinic. After that, "transportation" and public schools would seem to be part of a natural progression. The spread of diseases around the world through passengers transmitting diseases to other passengers is perhaps the greatest risk with respect to the fear of "global pandemics". While much of those fears are related to viruses (which are not affected by silver), bacterial infections are still a very serious issue with respect to disease-transmission - especially given the "super-bugs" which have become nearly completely resistant to antibiotics.
The other factor which favors the rapid spread of silver anti-bacterial applications is that the silver is only used in trace amounts. This is another enormously important aspect of silver's "price inelasticity". When a commodity is only used in tiny amounts, even enormous leaps in price will have only a tiny impact on demand.
To illustrate this in crude fashion, let's look at the use of silver in polyester sportswear, an application which regular readers have seen me discuss on several occasions. As I have mentioned previously, silver is used in polyester sportswear because of its anti-bacterial properties. However, in this case, the silver kills bacteria not to prevent disease but to reduce odor. It is the bacteria which are contained in our perspiration which are responsible for odor. Kill the bacteria and you greatly reduce odor.
What is remarkable about this application is that (by weight) silver only represents 1/40,000th of total inputs. I'm sure that some newer readers out there are thinking that while the use of silver in this application isn't sensitive to price (because of the tiny quantities involved), that such tiny amounts would be irrelevant to total, global demand. Wrong.
With over 20,000,000 tons of polyester sportswear being manufactured every year (as of 2008), that one use "consumes" over 1,200 tons of silver per year, or 38 million ounces per year - and this application is also in its infancy. Apart from the growing sportswear market, obviously there is enormous additional potential for silver throughout the clothing industry.
Don't you think that people spending large amounts of money for their "designer clothes" would want (or expect) that the manufacturers of those garments would also make them odor-resistant? All it takes is for one major designer to "go silver", and we can expect a host of "copy-cats" following in their footsteps.
The other important point to make here is that if silver can be used in tiny quantities as an anti-bacterial agent in sportswear, then it is reasonable to assume that all of silver's anti-bacterial products will use silver in similarly small amounts - and the number of such potential anti-bacterial products is only limited by our imaginations.
Let me illustrate, through a hypothetical example, just how "inelastic" is such demand. I have no data on the cost of the other inputs in polyester sportswear, but I can afford to be "generous". Let's assume that silver is (on average) 400 times more expensive than the other inputs of this product. It's likely an over-estimate of the cost of silver, but it's a very handy, "round" number.
With silver representing 1/40,000th of inputs by weights, and if silver was 400 times more expensive than those other inputs, this would result in silver accounting for 1% of production costs for this product. This means that even if the price of silver increased ten-fold, it would only result in the cost of silver becoming a mere 10% of production costs, and represent roughly a 9% increase in the price of the end-product.
Let me repeat this. Using the numbers above, a 1000% increase in the price of silver would result in a 9% increase in the price of this anti-bacterial product. And it is perfectly reasonable to assume that most of silver's anti-bacterial applications employ silver in similar ratios. What this translates to in current prices is that silver could rise to close to $200/oz and have (at worst) only a minor impact on silver's use in this one application.
Keep in mind that this entire discussion revolves around only one of silver's multitude of "industrial" applications. Silver is also used in such low-tech manufacturing such as silverware, soldering, mirrors, electronics and photographic film, while its higher-tech applications include next-generation batteries, high-precision bearings, chemical catalysts, solar energy, and water purification (in addition to the infinite number of medical/hygiene applications).
Obviously, some of these applications use larger quantities of silver, and thus not only are they more sensitive to price, but the silver is used in greater amounts (and thus can be recycled). However, we cannot forget about silver's superior properties. Silver is (by far) the best metal for use in solar energy, due to both its chemical properties and its higher "brilliance" than any other metal. In order for solar power to truly become an effective source of power, we need to use the best solar cells we are capable of designing. Thus, for this entire field, there is essentially no substitute for silver at any price.
The other "industrial application" which I want to focus upon is another "low-tech" use which has been all-but-forgotten: silver jewelry. I have tried (in a previous commentary) to get silver-bulls enthused about silver's potential in the future as the next premier metal to be used as jewelry. Currently, silver "jewelry" is confined primarily to men's cuff-links and tie-clips, and as "junk jewelry" (primarily for younger women). When it comes to "women's jewelry", silver is almost completely snubbed - totally due to its low price.
With silver being the most "brilliant" of all metals, there are no objective reasons to prefer gold jewelry to silver jewelry - except for price and rarity. Silver jewelry has had little appeal for adult women in recent decades because it was so "common", and (in a related criticism) cheap.
Silver is roughly 17 times as common as gold in the Earth's crust. This differential has been exaggerated by the grossly disproportional price ratio between silver and gold - which is currently greater than 60:1, and has remained at or above 50:1 for most of the last two decades. However, as I have discussed previously, one of those two parameters has already changed dramatically.
MORE at link
https://www.ainsliebullion.com.au/ResearchMoreAboutBullion/WorldwideArticles/tabid/68/language/en-AU/Default.aspx?articleid=68
Jeff Nielson
www.bullionbullscanada.com
06/05/2010
Jeff Nielson
May 3, 2010
In Part I of this series, I introduced readers to the idea that the price of silver could soar to levels which would even surprise most silver-bulls. In Part II of this series, I pointed out that when our "paper inventories" of silver are exposed that this, alone, sets up the silver market for an enormous price-shock. In Part III of this series, I will discuss how silver has perhaps the most-bullish demand fundamentals of any commodity in history.
As I stated at the beginning of this series, a "three-digit price" for silver is assured, while over the long term, that price could rise close to, or above the $1000/oz-mark...but I am getting ahead of myself. This series is all about studying the dynamics of the silver market, so what I will focus on is what we can expect to happen in the silver market (on the demand side) as silver rises to, and then above $100/oz.
The first general point to make about the market for any commodity (or any "goods") is that markets typically have a "self-correcting" mechanism for when supply and demand are badly out of balance. If supply greatly exceeds demand, prices typically fall until demand is stimulated enough by the falling price to equal supply. Conversely, when demand grossly exceeds supply, prices rise - until that rise in price either discourages demand, or encourages new "supplies" to come onto the market to create an equilibrium.
What has gotten me so excited about silver is that such "self-correcting mechanisms" are almost totally absent from the silver market. As I have already discussed on the supply-side, a quadrupling of the price of silver has resulted in a very muted supply-response. This suggests one of two scenarios: either we have already reached some sort of "peak silver" equation (where supply cannot be ramped-up dramatically - at any price-level), or else silver simply needs to rise to a much higher price to begin to lead to increased mine supply.
The other component of supply which we cannot ignore is the "scrap market". With silver having been mined for nearly 5,000 years (along with gold), at one time there were enormous global "stockpiles" of silver - silver that is either stored/held by governments, or hoarded by private entities. However, according to the research of noted silver authority, Ted Butler, somewhere around 90% of those stockpiles have been "consumed" over the last 50 years. Thus, no matter how high the price of silver goes, we cannot see any major growth in supply from "scrap sales", simply because that silver is already gone.
It's now time to examine demand more closely, and what we find here is that as with supply, there is no self-correcting mechanism to moderate the price of silver as it moves higher and higher. In economics, when we talk about supply or demand, we refer to the concept of "elasticity". Goods which respond dramatically to changes in price are said to be very "elastic" with respect to price. Goods where price-changes cause little change in demand are said to be very "inelastic".
In the case of silver, we are very possibly looking at the most inelastic demand of any commodity which is broadly used/traded in our economies. In other words, even extreme rises in the price of silver will have only a very modest impact on demand. There are two, totally separate reasons why demand for silver is more inelastic than that for any other commodity.
First of all, as I mentioned in Part I (and discuss frequently), silver is not only the most versatile of all metals, but with several of its chemical/metallurgical properties it is essentially unique - meaning that there are no "substitutes" which are available to replace it. Similarly, with some of its properties it is so much superior to other metals that it is effectively irreplaceable.
In the first category is silver's use as an anti-bacterial agent. Silver is unique in possessing chemical properties which make it impossible for bacteria to reproduce. There are two extraordinary implications for this chemical property. First of all, it is impossible for bacteria to ever develop "immunity" to silver anti-bacterial products - unless they literally evolved into a new species (a process generally requiring at least thousands of years).
This means that our health-care systems can use existing products (and develop an infinite amount of new anti-bacterial products) without any fear of such capital expenditures being rendered obsolete/ineffective. And because this is a chemical property unique to silver, there is no possibility of any other commodity being substituted for it - at any price.
At a time when silver inventories are virtually gone, we have a new application for silver (in its very infancy) where there are a virtually infinite number of potential applications, which are certain to remain in demand for centuries (and likely longer) and where there is no possible substitute for silver. As an example of the demand-pressures on silver from this one application, I saw an interesting article on a U.S. government initiative to punish U.S. hospitals which have high levels of deaths/injuries from "medical mistakes" and "preventable" causes. "Preventable re-admissions" alone cost the U.S. health-care system $25 billion/year.
With the entire U.S. medical system being crushed by the burden of totally unsustainable costs, no hospital can afford to be "punished" for poor safety/quality of care, and at the top-of-the-list among "preventable" conditions are the vast number of "secondary" bacterial infections which are epidemic in hospitals all over the world.
As an example of this enormous carnage in our hospitals, 30,000 Americans die every year just from "catheter-related blood stream infections". While I lack the medical expertise to conclude that this problem could be solved or abated with some sort of "silver catheter" being used, given the vast array of silver anti-bacterial products already created, a "silver catheter" would seem to be a very straightforward innovation.
A great place for investors to learn about some of these uses is at The Silver Institute. Searching through its "news" and "uses" sections will give people a general idea of the extraordinary range of possibilities in this single application. I lack the space to even summarize all the uses which have either already been developed, or are being currently researched.
Instead, I will simply speak of the one, particular use which immediately caught my attention when I first heard about it: silver upholstery. It would already seem to be a "done deal" that we will see silver-upholstery being used for all furnishings in hospitals. In addition to formal "pressure" being exerted on hospitals to reduce preventable infections (i.e. the new U.S. initiative), potential legal liability for any hospital which does not utilize this innovation will likely be a much stronger factor in compelling hospitals to act.
Consider how the issue of "liability" operates in our legal system. While the number of "preventable deaths" in our hospitals is atrocious (more than 10,000 Canadians die every year as a result of "medical mistakes"), holding hospitals and medical personnel responsible for these deaths hinges on whether there were/are any practical alternatives to prevent the "harm" in question. If merely choosing a different fabric for furnishings could potentially reduce such bacterial infections (and deaths), this is a "practical alternative" which our courts would not hesitate to impose on our health-care systems...and the day after hospitals begin to systematically switch to silver furnishings, there will be lawyers looking for new avenues of "liability" in this regard.
The next likely "targets" to face pressure to switch to silver upholstery would be every doctor's office and medical clinic. After that, "transportation" and public schools would seem to be part of a natural progression. The spread of diseases around the world through passengers transmitting diseases to other passengers is perhaps the greatest risk with respect to the fear of "global pandemics". While much of those fears are related to viruses (which are not affected by silver), bacterial infections are still a very serious issue with respect to disease-transmission - especially given the "super-bugs" which have become nearly completely resistant to antibiotics.
The other factor which favors the rapid spread of silver anti-bacterial applications is that the silver is only used in trace amounts. This is another enormously important aspect of silver's "price inelasticity". When a commodity is only used in tiny amounts, even enormous leaps in price will have only a tiny impact on demand.
To illustrate this in crude fashion, let's look at the use of silver in polyester sportswear, an application which regular readers have seen me discuss on several occasions. As I have mentioned previously, silver is used in polyester sportswear because of its anti-bacterial properties. However, in this case, the silver kills bacteria not to prevent disease but to reduce odor. It is the bacteria which are contained in our perspiration which are responsible for odor. Kill the bacteria and you greatly reduce odor.
What is remarkable about this application is that (by weight) silver only represents 1/40,000th of total inputs. I'm sure that some newer readers out there are thinking that while the use of silver in this application isn't sensitive to price (because of the tiny quantities involved), that such tiny amounts would be irrelevant to total, global demand. Wrong.
With over 20,000,000 tons of polyester sportswear being manufactured every year (as of 2008), that one use "consumes" over 1,200 tons of silver per year, or 38 million ounces per year - and this application is also in its infancy. Apart from the growing sportswear market, obviously there is enormous additional potential for silver throughout the clothing industry.
Don't you think that people spending large amounts of money for their "designer clothes" would want (or expect) that the manufacturers of those garments would also make them odor-resistant? All it takes is for one major designer to "go silver", and we can expect a host of "copy-cats" following in their footsteps.
The other important point to make here is that if silver can be used in tiny quantities as an anti-bacterial agent in sportswear, then it is reasonable to assume that all of silver's anti-bacterial products will use silver in similarly small amounts - and the number of such potential anti-bacterial products is only limited by our imaginations.
Let me illustrate, through a hypothetical example, just how "inelastic" is such demand. I have no data on the cost of the other inputs in polyester sportswear, but I can afford to be "generous". Let's assume that silver is (on average) 400 times more expensive than the other inputs of this product. It's likely an over-estimate of the cost of silver, but it's a very handy, "round" number.
With silver representing 1/40,000th of inputs by weights, and if silver was 400 times more expensive than those other inputs, this would result in silver accounting for 1% of production costs for this product. This means that even if the price of silver increased ten-fold, it would only result in the cost of silver becoming a mere 10% of production costs, and represent roughly a 9% increase in the price of the end-product.
Let me repeat this. Using the numbers above, a 1000% increase in the price of silver would result in a 9% increase in the price of this anti-bacterial product. And it is perfectly reasonable to assume that most of silver's anti-bacterial applications employ silver in similar ratios. What this translates to in current prices is that silver could rise to close to $200/oz and have (at worst) only a minor impact on silver's use in this one application.
Keep in mind that this entire discussion revolves around only one of silver's multitude of "industrial" applications. Silver is also used in such low-tech manufacturing such as silverware, soldering, mirrors, electronics and photographic film, while its higher-tech applications include next-generation batteries, high-precision bearings, chemical catalysts, solar energy, and water purification (in addition to the infinite number of medical/hygiene applications).
Obviously, some of these applications use larger quantities of silver, and thus not only are they more sensitive to price, but the silver is used in greater amounts (and thus can be recycled). However, we cannot forget about silver's superior properties. Silver is (by far) the best metal for use in solar energy, due to both its chemical properties and its higher "brilliance" than any other metal. In order for solar power to truly become an effective source of power, we need to use the best solar cells we are capable of designing. Thus, for this entire field, there is essentially no substitute for silver at any price.
The other "industrial application" which I want to focus upon is another "low-tech" use which has been all-but-forgotten: silver jewelry. I have tried (in a previous commentary) to get silver-bulls enthused about silver's potential in the future as the next premier metal to be used as jewelry. Currently, silver "jewelry" is confined primarily to men's cuff-links and tie-clips, and as "junk jewelry" (primarily for younger women). When it comes to "women's jewelry", silver is almost completely snubbed - totally due to its low price.
With silver being the most "brilliant" of all metals, there are no objective reasons to prefer gold jewelry to silver jewelry - except for price and rarity. Silver jewelry has had little appeal for adult women in recent decades because it was so "common", and (in a related criticism) cheap.
Silver is roughly 17 times as common as gold in the Earth's crust. This differential has been exaggerated by the grossly disproportional price ratio between silver and gold - which is currently greater than 60:1, and has remained at or above 50:1 for most of the last two decades. However, as I have discussed previously, one of those two parameters has already changed dramatically.
MORE at link
https://www.ainsliebullion.com.au/ResearchMoreAboutBullion/WorldwideArticles/tabid/68/language/en-AU/Default.aspx?articleid=68
Jeff Nielson
www.bullionbullscanada.com