After the dramatic decline of the price of silver by 44.5% from its all time high, $48.97 an ounce, on April 28, 2011 to $27.18 an ounce on July 17, 2012; one might ask if an investment opportunity has arisen. In order to find out if now is the proper time to invest in silver, the fundamental parameters of this important metal - demand, supply and reserves - require analysis.
The price of the most popular silver ETF, iShares Silver Trust (SLV) has declined 44.0% in the same period.
Demand for Silver
Silver has innumerable applications due to its unique properties. Silver is a white, lustrous, metallic element, which conducts heat and electricity better than any other metal. Silver is the most malleable and ductile of all metals, with the exception of gold. Silver halides are photosensitive and have an astounding ability to record a latent image that can later be chemically developed.
Since ancient time silver has been valued a precious metal, and it has been used as an investment, to make jewelry, silverware, coins and medals. Today, silver metal is also used in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions. Its compounds are used in photographic film and also as disinfectants and microbiocides.
Industrial demand, including electronics, industry and solar panels, was the main sort of demand for silver in 2011, representing 47% of the total one. The total world silver industrial demand rose from 12,031 metric tons in 2000 to 15,130 metric tons in 2011, while the Compound Annual Growth Rate (CAGR) was 2.11%. The growth rate was less than the world mine production growth rate, that was 2.73% in the same period.
Demand for Jewelry
The demand for jewelry represented 15% of the total demand in 2011. The total world silver demand for jewelry declined from 5,485 metric tons in 2000 to 4,970 metric tons in 2011, while the Compound Annual Growth Rate (CAGR) was -0.89%. The main reason for this decline was the increase in the price of silver, from an average $5.0 an ounce in 2000 to an average of $36.5 an ounce in 2011.
Demand for Photography
The demand for photography, which represented 29% of the total demand in 2000, declined to only 6% of the total demand in 2011 due to the digital photography revolution. The total world silver demand for photography, declined from 7,019 metric tons in 2000 to 2,056 metric tons in 2011, while the Compound Annual Growth Rate (CAGR) was -10.56%.
The total world coins and medals demand rose from 949 metric tons in 2001 to 3,676 metric tons in 2011, while the Compound Annual Growth Rate (CAGR) was 14.51%. Just like in the case of gold, the demand for silver coins and medals for investment purposes is increasing significantly.
The total world silverware demand declined due to the increase in the price of silver, from 3,300 metric tons in 2001 to 1,431 metric tons in 2011, while the Compound Annual Growth Rate (CAGR) was -8.02%.
The total world silver investment demand, by means of physical silver ETFS and silver bars, increased significantly in the past few years and was 5,100 metric tons in 2011.
On the one hand, we see a declining trend in the growth rate of silver for industrial purposes due to the increase in its price. Silver demand for jewelry and silverware is declining because of its high price, and silver demand for photography is declining due to the change to digital photography. Even the fast growing use of silver in solar panels, which is relatively new, might eventually decrease, because major industrial companies are moving to copper instead of silver for reasons of cost reductions.
On the other hand, we see a significant increase in silver demand for coins and medals and for physical silver ETFS and silver bars.
In the 2nd part of this article we will discuss the tendency of silver supply and reserves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.