Tuesday, December 2, 2014

Silver: What does the Future Hold For It?

Yesterday we took a look back at the year 2014 and a peek ahead into the year 2015. What we cover here are events that could lead to major change in the monetary system. We don't know if the change might come about rapidly as a result of another financial crisis or if it might unfold over time as the role of the US dollar as a global reserve currency diminishes. Regardless of how change happens, it is a good idea to have a plan in mind for how to deal with change. Silver can play a part in that for the average person who may not be able to afford much gold.

If there is another crisis, it is very likely that both gold and silver will serve as safe havens for people around the world. History tells us this and there is no reason why that would change in the future. Both will always have intrinsic value and have held their purchasing power over long periods of time. So, it is obvious why silver can play a part in planning for the future if another crisis does happen. Silver has even been used as money so everyone will accept it in a crisis situation. It would probably even be easier to use than gold for the average person.

But what if another crisis does not happen? Or, what if it is many years into the future before one returns? Beyond that, what if financial authorities are able to avoid another crisis completely even though they have issued a number of warnings like we noted here about that possibility?

Does silver play any role in a future like that? I think it does. This article by Frank Holmes in US Global Investors explains why. It is because silver has a strong future as an industrial product regardless of whether there is another financial crisis or not. Here some quotes from the article that illustrate what I mean:

"Since 1999, photography has increasingly gone digital, and as a result, silver demand in the film industry has contracted about 70 percent. But there to pick up the slack in volume is a technology that also requires silver: photovoltaic (PV) installation, otherwise known as solar energy.
For the first time, in fact, silver demand in the fabrication of solar panels is set to outpace photography, if it hasn’t already done so."
"Other industrial uses of silver can be found in cell phones, computers, automobiles and water-purification systems. Because the metal also has remarkable antibacterial properties, it’s used in the manufacturing of surgical instruments, stethoscopes and other health care tools."
. . . . . . . . . . 
"This investment opportunity will likely expand in light of the climate agreement that was recently reached between the U.S. and China. Back in April I discussed how China, in an effort to combat its worsening air pollution, is already a global leader in solar energy, accounting for 30 percent of the market."
"With PV installation on the rise, silver demand is ready for a major surge. About 80 metric tons of the metal are needed to generate one gigawatt, or 1 million kilowatts, of electricity—enough to power a little over 90 typical American homes annually. In 2016, close to a million and a half metric tons of silver are expected to be needed to meet solar demand in the United States alone."
The article goes on to give a picture of the future where demand for silver grows exponentially. This is without any demand from investors or others who see silver as a way to protect their wealth from inflation or financial troubles, etc.

Having worked in the oil industry for over 35 years, I have some understanding of how supply and demand works for things like oil and silver. There will be demand for oil and gas well into the future. But, as the global energy picture changes, demand will steadily increase for silver. Not only in solar panels, but also in batteries that use silver. 

The world population keeps growing, but the supply of silver on the earth does not. There is only so much silver that can be mined at lower prices. At some point, the cost to mine the silver that will be needed will be much higher per ounce than the price of silver is today. This makes silver an ideal asset to use as a long term insurance hedge. If there is another global financial crisis, those holding silver will be glad they have it as insurance. But even if there is no crisis, long term savings held in the form of silver should see steady price appreciation over time as the demand keeps growing and low cost supply begins to fall off. 

I really see silver as a very low risk way to hold some insurance savings for the long term. Everyone knows it is wise to build up an emergency "rainy day" fund if you can. Taking this just one step further would be to allocate some of that rainy day fund to silver. The risk is reasonably low at current prices. It also meets the investment goal of true diversification. Trying to short term trade things like oil and silver is usually a bad idea for non professional traders. However, a very long term savings fund with some silver in it seems like a good way to prepare for whatever monetary system changes that come our way in the future. A rainy day fund is something you hope you never need, but are glad you have if you do. Almost everyone can afford to at least put some away and hold it. It's even a good asset to pass on to your kids if you never actually need it.

Added notes: Here is an interesting slide presentation on silver from the article linked above. And, just for the record, I have no connection to US Global Investors. It's just a very well written free article on silver in my opinion that presents some useful facts.

For those interested in technical analysis (chart analysis) here is that.

And here is the mid 2014 Silver Institute Supply-Demand Report

Also: Ben Davies of Hinde Capital (London) says the reversal day in silver Monday marks a bottom in the silver market and he thinks it goes higher from here in this KWN interview. We will follow this to see if he gets this call correct. It would also help out Bo Polny's forecast. We'll track it here. This blog is not intended to give out any kind of investment advice. I just think silver is one reasonable fairly low risk way to hold some insurance for most people.

Update 12-7-14: Australian Scientists announce Solar Energy Breakthrough

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