One of the bullish arguments I frequently hear about silver is that its use in industrial and medical applications was growing exponentially and that such rapid consumption of silver would lead to a squeeze on available supplies. The technologies touted included increased use in electronics, batteries, solar panels, RFID tags, medical applications and of course the much hyped cruise missiles. While these new uses of silver has led to tremendous growth in industrial demand for silver, is it enough to drive the price of silver much higher? The short answer is no.
Consider the chart below from the Silver Institute’s 2011 World Silver Survey. Notice the strong increase in industrial demand since 2001. Over that period, the use of silver in industrial applications increased from 350 million ounces to 487 million ounces, a 39% increase. However, over the same period demand for silverware and photography has dropped considerably more. Silverware demand fell from 106 million ounces to 50 million while photography dropped from 213 million to 73 million today. Thus although the use of silver for industrial purposes has and will continue to grow strongly, it has not been enough to offset the loss from other applications.
The silverware component has been particularly interesting to me recently. Over the past three months I’ve been doing consulting work for a precious metals refiner and was surprised by not only the quantity of silverware being returned to the smelter but of the quality. I have seen many high quality silverware sets, including some that were still in their original packaging that likely sold for $10,000 or more retail being scrapped like it was nothing. If one can only get melt for a beautiful sterling silverware set, it makes sense that manufacturers will not be making much more of it in the future (if you’re in the market for sterling silverware, let me know!).
In fact, as shown in the chart above and further detailed below, if not for investment buyers silver supply would greatly exceed demand. That is not necessarily a bad thing. Gold’s industrial and jewelry demand as a percentage of supply is even smaller and that hasn’t negatively impacted the metal. Likewise, it doesn’t mean that I am bearish on silver. Quite the opposite, at current levels it appears to be very attractive. But it is investment demand (and a declining dollar) that will drive it higher, not its industrial uses.