Reality Calls Gfms Survey Conclusions Into Question
The silver market is once again being baffled by conflicting information and the strangest thing is that the confusion seemingly traces back to the organization whose mandate is to ensure that the silver supply/demand picture is both precise and positive.
As I write this, press releases have just been issued detailing results of the World Silver Survey, an annual silver market summary compiled by Gold Fields Mineral Services (GFMS), independent of the U.S. based Silver Institute the organization to which I refer. One release - titled "Silver Demand Forecast to Fall" - projects that prices will likely drop this year "because of ample supplies, increased mine production and the sale of silver stocks."
The writer does leave a glimmer of hope for silver bulls, noting "there was a sudden spurt in demand last year," and quoting the World Silver Survey as follows: "The report says increased use of silver in industrial applications was the 'prime driver' behind the rise in the total demand last year. Overall, world silver fabrication demand grew by more than 5 percent, while use in industrial applications, such as semiconductors and cellular phones, rose by 11 percent to 378m ounces."
However, he just as quickly dashes that bullish hope by warning, "Just as supply issues begin to look more favorable in the current year, demand could tail away in key areas."
Let me make one thing clear here. I don't want to refute the numbers produced by GFMS. In fact, I frequently use their Survey results in my work. What I do want to do is challenge their conclusions - and get you to think for yourself rather than blindly accepting the above analysis. For starters, let me ask you a couple of questions:
Silver demand exceeded supply last year - for the eleventh consecutive year! Does 11 straight years of supply deficits sound like "a sudden spurt in demand" to you?
Total world silver supply last year was estimated at 300 million to 500 million ounces. Does a total supply of 300 million to 500 million ounces seem bigger or smaller than the 2 billion ounces of total silver supplies in 1980 - when the price went above $40 per ounce?
Finally, what's the possible basis for a projection that demand could "tail away in key areas"?
To illustrate the validity of this last question, let me briefly digress from the Survey results. By now, everyone should be aware of the on-going energy problems in California and elsewhere, as well as the key arguments against most of the possible alternatives for generating additional electrical power. What if I were to tell you there is a very viable solution to this energy problem? What if I said this solution won't require a single new power plant to be built, nor any increase in the burning of fossil fuels? What if this positive solution were already fully developed and ready to implement - and, once it's in place, no new power sources will be required for many years?
Wouldn't that be a gift from Heaven, so to speak? I'm sure your answer's a resounding yes - so I'll assure you, flat out, that what I've just described does indeed exist.
What I'm talking about relates to a problem known as "line loss." Specifically, when electricity is generated, not all the power reaches the end user. A large percentage of it is simply eroded away by the resistance it encounters in the lines through which it is transmitted. In fact, this "line loss" sometimes runs in excess of 30 percent. However, there is a method that, for practical purposes, can reduce the line loss to almost nothing. It involves a technology called superconductivity.
I first became interested in this technology after reading a back grounder prepared by the Silver Institute. (Yes, the very same Silver Institute that brought you the GFMS Survey cited above. See superconductivity.) In researching the technology, I discovered there is a company that now has it fully in place the American Superconductor Corporation (ASC). ASC's corporate profile reads as follows:
"American Superconductor Corporation is a world leader in developing and manufacturing products utilizing super-conducting materials and power electronic devices for electric power applications. American Superconductor's products - and those sold by electrical equipment manufacturers that incorporate its products - can dramatically increase the capacity and reliability of power-delivery networks, significantly reduce manufacturing costs for electrical equipment such as motors and generators, lower operating costs and conserve resources used to generate electric power. Founded in 1987, the company is headquartered in Westborough, Mass. For more information, visit www.amsuper.com."
That obviously sounds great for the power-hungry people of California, but the question for us now becomes, "What does this have to do with silver?"
The answer is: Everything!
According to the Silver Institute backgrounder, the super-conductivity technology requires one ton of silver per mile of super-conducting transmission line.
A ton per mile! Now that's a lot of silver - a reality you have to admit even if you're bearish on silver. To illustrate, let's hypothesize a transmission line from New York to San Francisco - a line that would require about 3,000 miles of super-conducting wire. That would be 3,000 tons of silver. Stated in more familiar terms, that's approximately 96 million ounces of silver.
Ninety-six MILLION! That's roughly one-quarter of last year's total industrial consumption of silver - for just one transmission line.
Since the Silver Institute is supposedly biased in favor of silver (in spite of the latest GFMS report), I didn't want to take its figures at face value. So, I called ASC for confirmation. I spoke to a corporate vice president, asking if he could verify how much silver the Company used in its technology. The answer was a very firm, "NO!" Seems it's a closely guarded trade secret.
Determined, I carried my investigation further, finally tracking down an article written by a leading utility industry forecaster. In the story, he projected the same usage - but I later found out his data also came from the Silver Institute.
Still undeterred, I took advantage of my recent interview with the Herald-Tribune, explaining the technology to the reporter and mentioning that I was having trouble verifying the quantity of silver used. The reporter loved this aspect of the story I was helping him with, so he contacted ASC as well, bringing to bear the power of the press. Unfortunately, even that power wasn't enough as he was also informed the numbers are private. And, in the one negative note in all this, he was also told that ASC is developing a second-generation super-conducting product that will use somewhat less silver than is now required.
Despite that caution, however, the prospects for super-conductivity still strongly reinforce my contention - which is simple. Contrary to the GFMS Survey, there's absolutely no evidence of an impending drop in industrial demand for silver. Although you certainly don't read about most of them in the popular press, more and more applications are developed for silver every year - especially in the high-technology sector. In fact, there are so many new uses that silver might possibly be viewed as the ultimate "technology stock."
And, don't forget: The tremendous potential silver has as a component for technological advancement represents only half the story. The farther we move down the fiat money road, we may ultimately see the investment demand for silver greatly exceed the industrial demand.
Thus, in spite of what you may hear in media accounts about the Silver Institute's new GFMS Survey, I firmly believe the silver outlook remains clearly positive.
May 21, 2001
David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html