Silver is the Future of Jewelry

August 18th, 2009

By Jeff Nielson

In several previous commentaries, I have alluded to the extremely bright future for silver jewelry as yet one more reason to be extremely bullish about silver. To my surprise, these remarks have drawn little response from readers. As a result, I've decided to devote an entire commentary to this subject – to drive home the importance of this source of increased future demand.

To put the jewelry market into context, total jewelry demand was a little over 2,600 tons in 2008 (using numbers supplied by the World Gold Council and The Silver Institute). As a result of the chaos in markets, and the global recession which took hold in the 2nd half of last year, this is down roughly 10% from jewelry consumption in 2007, and slightly lower than 2006 demand. Thus the 2,600-ton figure should be considered a minimum consumption-level for jewelry globally (especially given the steadily rising incomes in the world's developing economies).

Out of this total consumption, gold jewelry comprised over 80%. Put another way, silver jewelry represented less than 1/5th of total demand. The demand for gold jewelry has fallen in the last couple of years – as a response to gold rising to a new, (nominal) record-price of over $1000/oz. However, that drop in demand has been quite modest, given the magnitude of the rise in price.

While gold jewelry demand dropped by 12% from 2007 to 2008 (due to the impact of the global recession), the demand in '08 was only about 5% lower than in 2006. This easing in demand has had no negative impact on the price of gold, since it has been more than offset by increasing investment demand (see “Gold demand driven by investment...PERIOD!”).

Furthermore, this modest decline in demand should not be seen as a lessening of desire to own gold jewelry – indeed, quite the opposite. As a general principle, all “luxury goods” are coveted more as the price rises, since it is a fact of human nature that those wealthy enough to purchase/own luxury goods do so in part to demonstrate (or flaunt) their wealth to other members of society.

Thus, the desire to own gold jewelry increases as the price of gold increases. The slight drop-off in demand is due entirely to the fact that gold has risen to a price which makes it unaffordable to a significant number of previous buyers.

This brings us to silver. With silver also being a “precious metal”, the obvious question which comes to mind is why does silver jewelry represent less than 1/5th of total jewelry demand? Like gold, the price of silver has more than tripled this decade. However, unlike gold, demand for silver jewelry is not limited by the fact it is too expensive. Instead, demand for silver jewelry is limited by the fact that silver is too cheap.

Despite silver's esthetic qualities, owning/wearing jewelry made from a metal which currently costs less than $15/oz is hardly the “status symbol” for jewelry owners (primarily women) which these owners desire – especially when compared to jewelry made from a metal which currently costs roughly seventy times more (one of the most lop-sided gold/silver price ratios in history).

Therefore, it is a matter of basic logic (and arithmetic) that as the price of silver increases, the demand for silver jewelry will also increase. For silver-bulls, this unequivocal fact has stunning implications. As I (and many other precious metals commentators) have pointed out, it is absolutely certain that silver will greatly outperform gold (in terms of rising prices) in the future.

As with gold, annual mine production of silver (the primary source of supply) is flat. Like gold, the investment demand for silver has been soaring, even as the prices of precious metals have also risen (a very bullish indicator for this sector). However, silver benefits from two extremely important supply/demand fundamentals which are completely absent from the gold market.

First of all, for many “market experts” who are uneducated about precious metals, silver is now referred to as an “industrial metal” - despite 5,000 years of history as a “precious metal”. The reason for this ignorance among “experts” is that silver also possesses many extremely useful chemical/metallurgical properties which has resulted in the massive consumption of silver in a variety of industrial applications.

For many years, silver's use in photographic film dominated its industrial uses. However, even as silver's use in film has dropped off dramatically with the rise of digital photography, countless other industrial applications have recently been discovered – which more than offset the decline in that one source of demand. In fact, during this decade, new patents for silver exceed those for any other metal (see “Increasing Demand for Silver comes from MANY sources”).

This brings us to the most important fundamental for the silver market: the world's supply of silver is (literally) being rapidly “consumed”. The evaporation of global, silver stockpiles has occurred because the vast majority of silver used “industrially” is in products where silver is used in tiny quantities. Because of this, it is impractical (if not impossible) to ever recover/recycle this silver – meaning it is effectively gone forever (or “consumed”).

When I refer to silver stockpiles being “consumed”, I am not referring to some gradual decline. Over the last 50 years, roughly 90% of global, silver stockpiles have been permanently consumed (see “History of Silver, Part III: inventories gone!”). As a result of this depletion, while the price of gold (versus silver) has rarely been higher in history, the supply of silver (versus gold) has never been lower.

Thus, based on these extremely strong supply/demand fundamentals (excluding the global jewelry market), it is not a question of “if” the price of silver will rise, but rather how many multiples of the current price will it rise. Basic economic analysis tells us that a ten-fold increase in price would not be the least bit surprising.

As I have discussed on many occasions, the price of silver has been ruthlessly suppressed for decades. This can be demonstrated by the blatant manipulation by the silver “shorts” in the Comex futures market, where two bullion banks hold the largest concentration of market share in the history of commodities. It can be demonstrated by the open admissions of manipulation by people such as former Federal Reserve chairman, Alan Greenspan, and officials from the Bank for International Settlements (the “bank” for all the world's central banks).

Most importantly, it can be demonstrated by the under-valuing of silver which has resulted in massive, over-consumption. When consumption exceeds supply by such a huge margin that global stockpiles have been wiped out over a relatively short period of time, there can be no argument that silver is grossly under-priced. By definition, a “fair market value” for a commodity leads to supply/demand equilibrium – that is, where annual supply and demand are balanced.

When a commodity remains grossly under-priced for decades, while stockpiles vanish there can be no argument that silver (like gold) has been ruthlessly manipulated by the anti-gold cabal – led by the Wall Street crime syndicate.

For that reason alone, when critical shortages of silver lead to an inevitable explosion in price (no matter how hard the Manipulators try to prolong their game), there are several crucial reasons to believe that this upward price-spiral will exceed the expectations of all but the most-rabid silver bulls.

To begin with, there is the lop-sided price ratio. Historically (over nearly 5,000 years), the gold/silver price ratio has averaged only 15:1. This is reinforced by the fact that the natural occurrence of the two elements in the Earth's crust is at a 17:1 ratio. It is therefore 100% crtain that this unsustainable price-ratio must swing strongly back toward silver.

At today's price of gold, an average ratio implies a current price for silver of over $60/oz. This is only the starting point. As stated earlier, the supply of silver relative to the supply of gold is lower than at any time in history (indeed, some commentators claim there is currently more available gold in the world today than silver). Thus, we can expect the price ratio between gold and silver to sink well below 15:1 – even if that move is only temporary. At a 10:1 ratio, the price of silver today would near $100/oz.

However, as any knowledgeable precious metals commentator will point out, there is every reason to believe that gold will continue moving higher to multiples of its current price. Despite the decline in demand for gold jewelry, despite the collapse in gold demand from India (the world's largest gold market, historically), and despite being at its weakest point seasonally, gold remains within 10% of its all-time record price.

Among many factors, the unprecedented injection of “liquidity” (i.e. newly-printed money) into the global economy guarantees that the price of gold (and most other commodities) must continue rising. As a result, the radical decline in the gold/silver price ratio will be occurring while the price of gold steadily rises. Already, this implies a future price for silver in excess of $100/oz.

However, this is still only part of the story for silver. Generally, when the price of anything rises, demand tends to decline – usually in a proportional manner. This is not the case with silver. Because silver is used industrially in trace amounts in (most of) its wide variety of products, even a radical jump in the price of silver would have only a tiny impact on the price of these silver-laced products.

For example, over three million ounces of silver are currently being consumed each other in the production of polyester sportswear, alone (where silver's unequaled anti-bacterial properties dramatically reduce the amount of odor caused by perspiration). However, silver represents 1/20,000th of total inputs in this product, by weight. Thus, even a ten-fold increase in the price of silver would have virtually no significant impact on the price of this good – and thus no effect on demand.

While this is not the case with every industrial usage of silver, this general trend means that silver demand is much less-sensitive to price than virtually any other commodity. This means that the price can soar much, much higher before any “market factors” begin to affect demand.

We come, at last, to silver as jewelry. I have already established that the relatively modest demand for silver as jewelry is due to the fact that silver is too cheap, and that demand for silver jewelry would be certain to increase with any substantial increase in price.

I have now also established that the future price of silver will be many multiples of the current price. Putting “two and two together”, we can now see that the demand for silver jewelry in the future will rise dramatically.

Keep in mind that silver does not need to rise to $1000/oz to become extremely popular as jewelry. Only a decade ago, the price of gold was below $300/oz – at a time when the demand for gold jewelry was breaking records. Less than a century ago, gold was priced at $30/oz, yet was just as sought-after.

While all prices have been inflated over that time, it would seem reasonable to project that as silver approaches $50/oz, or perhaps even $30/oz that global demand for silver jewelry will soar. This explosion in demand will be occurring at a time when the rising price of gold makes it increasingly unaffordable for many jewelry-buyers – further amplifying the demand for silver jewelry.

Most importantly, this explosion in future demand for silver jewelry will occur with our global stockpiles gone. This lack of supply can only push the price of silver higher still – which will fuel even greater demand for silver as jewelry.

Thus, there is essentially no built-in price “ceiling” for silver in our markets, unless/until silver is several hundred dollars an ounce. At that point, silver jewelry demand would be so strong, and well-established globally that there is no reason to believe that such prices couldn't be sustained by demand.

In other words, we could easily see a situation where an exponential increase in the price of silver could actually increase total demand. I challenge anyone to come up with any other commodity, any time in history where such bullish fundamentals have been present.

Let the so-called “experts” continue to snub silver as an “industrial metal”. These clueless buffoons don't deserve to share in the future profits which will accrue for all silver-holders. There is currently no investment opportunity in the world as “golden” as silver.

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