Silver Bullet

July 22, 2004

I have recently been asking myself the question: "What is the proportion of the silver content of photographic film that is recycled?"

My research told me that 80% of it was capable of being recycled, but I had no way of knowing how much was actually recycled. I even went to the trouble of emailing Eastman Kodak to ask the question, but have not (yet) received a reply.

Nigel Maund in his July 21st 2004 article on Gold-Eagle kindly provided the answer, for which I thank him. The answer appears to be around 70% - or 87.5% of the potential 80%.

Given this extremely valuable piece of information, the following "Sources and Uses" statements show a very interesting result.

Scenario 1 shows the most recent (2003) supply/demand situation, whilst Scenario 2 assumes that photographic demand (and hence production) falls to ZERO.

It should be recognised that (provided Nigel's number is correct) if photographic production falls to zero, then scrap reclamation sourced from photographic production will fall by 70% of the 2003 photographic production.

If one assumes that "Government Sales" has been the swing factor that has facilitated a balance of supply and demand over the years, then it can be seen that Government sales will fall from 82.6 million oz to 19.4 million oz - BUT THERE WILL STILL NEED TO BE GOVERNMENT SALES!

To repeat: The key factor to focus on here is that even if photographic sales fall to zero, there will still be a next excess of demand over supply, and Governments will still need to keep disgorging stockpiles.

Given the fact that "visible" above ground stockpiles are around (say) 150 million ounces (115mm oz of which is in Nymex stockpiles, of which only around 57mm ounces is actually available) we now have a clearer understanding of why the silver price has not (yet) exploded upwards. - The "true" excess of demand over supply is covered roughly 4.7 times by available inventories.

  • 150 - (115-57) = 92
  • 92/29.2 = 4.74

But this begs the question:

If the "true" shortage is only 19.4 million ounces, what is the "true" above ground stockpile availability? What if (for example) the above ground stocks are 75 million or 200 million ounces?

The short answer is that because China's stockpiles are not transparent we can never know. However, it stands to reason that disgorgement cannot continue forever, and the argument regarding a "collapse" in photographic demand for silver is a red herring (or a "furphy", as we say in Australia).

To me, the true "swing factor" is Investment. People tend to hoard (and value) that which is in short supply.

Now that it is clear (assuming the accuracy of Nigel's number) that there is unlikely to be a collapse of the silver price flowing from even an earthquake in the photographic market, it seems reasonable to anticipate a continuing increase in the price of silver.

In short, it seems that Silver is a "slam dunk" investment:

  • If my current bearishness (some would say "super" bearishness) turns out to be ill founded, then silver's unique properties will cause an escalation in its demand for industrial use in electronics, superconductors, and as an oxidising agent. (It's the oxidation that causes micro-organism cell walls to rupture which, in turn, facilitates disinfection of carriers such as water and wine)
  • If my bearishness turns out to be correct then the "investment" demand referred to above will start to grow strongly - probably sufficiently strongly to overcome any fall in industrial demand.

Finally, if this "best guess" estimate of 92 million ounces of available silver is correct, then at current prices, it would require significantly less than $1 billion to buy every last ounce; and with the Fed's pre-disposition to print dollars, gaining access to a "mere" $1 billion of them does not look to be particularly difficult.

Bottom line: For those who are worried about protecting themselves, but can't bring themselves to be anti-social in their investment behaviour, Silver appears to be a better "two way" bet than gold.

Most silver is produced as a byproduct of copper, gold, lead and zinc refining.

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