Silver has never been an investment for the faint of heart and 2011 has only added to its reputation as a capricious beast. From just over $30 when the year began, it dropped to $27 within a month, then rocketed to over $48 by early spring, only to free-fall to the mid $30s within a couple of weeks. By late summer, silver had worked its way back into the low $40s, but then collapsed again to just over $30 by October. After a push to the mid $30s, silver has now fallen back to the upper $20s, essentially where it was in late January, making a case for a buy at what some consider support levels, notwithstanding the fact that silver bounced between $10 and $20 for nearly 5 years prior to mid-2010.
But the real story of silver is not its short term volatility. It’s the fact that it is disappearing from the supply chain faster than almost any commodity in history. Unlike gold, which, once torn from the ground, tends to stay in place, not even losing its luster, silver is now being eaten up. The name of the devouring monster: electronics. The explosion in cell phones and other electronic devices and related industrial processes in the last couple of decades has created a demand-future for silver that is only now being seriously evaluated.
The demand for silver in electronics has roughly doubled in the past 10 years. For the first time in history, electronics consumes more silver than jewelry and silverware, the previous primary uses. And that’s key, since jewelry, as an example, is often stored and recycled, while silver used in electronics is simply lost to landfills. Today we are consuming more silver than mines produce, and the effect is accelerating. Add to this the fact that China and India are growing consumers of silver for electronic devices, with China becoming a major silver importer versus its earlier role as a silver exporter.
The net result is that global silver reserves are drying up faster than a Texas lake. Unlike with gold, the world today has only a small fraction of the silver now that it had a century ago. It’s a changing dynamic that many investors fail to appreciate, looking upon silver in its historic role as a monetary hedge. The price of silver, today being kicked around based upon the rise and fall of economies and currencies, will soon be viewed far differently.
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