World Silver Survey 2000: Red Herrings Across Silver's Tracks

September 30, 2000

Not long ago I allowed a couple of past Moneychanger articles to be published on GOLD-EAGLE. That generated some e-mail, among it a letter from a fellow who asked me about a silver article published on Grant's Interest Rate Observer website. Since Grant's unquestionably qualifies for the Big League of financial commentary, I ought to show proper humility responding to anything that appears there. However, this article by Andrew Kashdan missed the point badly. That was more important because the Kashdan article, which appeared on August 8, was echoed throughout the financial press, with or without attribution, as gospel and it's plain wrong on several points. Below you will find my response. F. Sanders

    I had a chance to read Andrew Kashdan's article on silver. He completely missed the point in analysing silver, and worse, twisted statistics to support his wrong conclusion.


    He presents the "digital will replace silver in photography" argument as if no one else had ever discovered it. Surprise, surprise, every parvenu silver analyst for the past twenty years has landed on this same spot. Surprise, surprise, they've been saying year after year that digital would replace silver in photography. Surprise, surprise, year after year the amount of silver used in photography increases.

    Silver may some day be replaced in photography, but not by digital and not any time soon.

  1. There is no other physical substance that has an electron shell that behaves like silver halide salts in the presence of light. Thus whatever technology replaces silver has to come from some completely different angle, but it won't be salts of boron or magnesium, etc. or digital. Ask any physical chemist.
  2. Even though the price of digital has fallen, and will continue to fall, nobody in his right mind would conclude that an $800 digital camera and a $2,000 computer needed to make it work offers a near substitute for a $10 disposable camera. This becomes even more ridiculous when you compare resolution, six to eight orders of magnitude greater with silver halide technology. "Hey, Margaret, is that you or the Doberman in that digital picture? I wished it focussed a little sharper."
  3. The next great surge in consumption of photography will come from Asia. What will these eager new consumers buy, an $800 digital camera with a $2,000 computer, or a $10 disposable camera?
  4. It is of course possible that something might be discovered to replace silver halide technology. If that happened tomorrow, how long would it take to replace silver halide technology completely? There are a lot of cameras out there, a lot of Fox Photo shops, etc. Answer: a long time. For the past twenty years analysts have been predicting digital would replace silver halide. Not only has it failed to happen yet, the use of photographic silver continues to rise year after year, in spite of loss of market share to digital.
  5. Conclusion: digital will not replace silver in photography at any time material to our discussion, i.e., the next two to four years.



    Mr. Kashdan also twists statistics to make his point. To compare how much silver photography consumes of "newly mined silver" skews the picture. It makes the denominator smaller than if compared to total silver supply or total silver fabrication demand, so it makes photography appear to consume more silver relative to other uses than it really does. The three major categories of silver fabrication consume roughly equal portions of silver, namely, Industrial, Photography, and Jewellery & Silverware (I would throw coins and medals into that last category as well). In 1999 Industrial used 343.2 million ounces (Moz), photography 246.4 Moz, and Jewellery & Silverware (with coins and medals) 287.8 Moz. You can see that photography is an important, but by no means exclusive, use of silver. Mr. Kashdan also neglects to point out the relative stability of photographic silver demand, probably because it would muss up his Digital Derailment Thesis (1990 - 1999, silver used in photography amounted to 221.1, 216.2, 210.3, 210.1, 213.1, 220.5, 224.6, 233, 244.6, 246.4 Moz. Hardly pining away.). Thus he misses the really big action in silver, namely, Jewellery and Industrial.


    The real swing in silver demand has come from India and jewellery (a.k.a. "investment") demand there. This is a function of Indian agricultural incomes and Indian import and tax policy. This is where big, sudden changes can arise, not from photography. Photography is a red herring, and none too fresh a fish at that. Like some wide-eyed cub reporter, Mr. Kashdan quotes a Kodak company spokesman (who has no interest at all in propagandising his company's product, right?) as saying that "by Christmas, using a lower-end camera and an ink-jet printer, people will consider [digital to be] comparable to traditional film." Flashing for the moment past my previous criticism (that you have to buy not only the digital camera but other equipment as well), this statement is utterly worthless. "People" (Who? What people? Where? Is there a survey or poll?) will "consider" (their value judgements will be changed, by means not identified) digital "comparable" to traditional.

    Holy Halides, Batman! But, uhh, but isn't it already "comparable" to traditional film? Considering the difference in resolution between digital and silver halide, the "people" he has in mind must be legally blind.


    Were I grading a freshman English paper, I would view this whole photography focus as someone waxing expansive on a narrow area because he had failed to research his subject thoroughly. It misses the point analysing silver. I also find Mr. Kashdan's referral to the widely respected CPM Group as "delusional" to step over the bounds of well-mannered debate. It shows both unworthy arrogance and ignorance.


    Mr. Kashdan shows little imagination in discussing the silver lease rate. While it is true that the lease rate hovers close to zero, he fails to ask where all that silver has been coming from for such a long time (11 years of deficits). Can "abundance of physical stocks" really explain it, or is there paper silver flooding the market? That is the issue, because I can't find all that cheap silver around. Newly discovered "sources" just seem to conveniently pop up, whenever needed as a rationalisation.


    Mr. Kashdan's discussion of silver provenance from by-product mining misses the point as well. True, most silver comes today as a by-product, but silver prices have fluctuated around $5.00 for ten years. Since most primary mines have a cost of production from $5.00 - $7.50 an ounce, it's highly unlikely that any new (or mothballed) ones will crank up before silver breaks out of this low trading zone. At that point, no zinc mine is going to double production just to profit from a little dab of by-product silver, nor can owners re-open and rev up primary silver mines in anything short of six months or a year.


    Next Mr. Kashdan makes an amazing discovery: photographic silver users actually recycle silver!! What a sleuth! This is the hottest news item of the last 160 years, i.e., as long as silver has been used in photography. So what? What's the point?

    Mr. Kashdan says the Warren Buffet silver represents an overhang rather than a vote of confidence. Ahh, a matter of interpretation, and one not to wax too cocky about. Time will unfold that mystery. At present Mr. Buffet's investment seems to have placed a floor under silver.

    Finally, he rests his entire argument against silver on its replacement in photography: "In other words, little can be done to prevent a major source of demand from eventually drying up. When waning photographic demand meets an inelastic supply, men and women of the investor class, at least, may find the splendour of silver decidedly uncaptivating." Wittily written, but does it wash as commodity analysis?

    No. Unfortunately it ignores the large (and growing) number of silver applications where silver lacks, as a practical matter, any economic substitute. This makes demand fairly unresponsive to price. (I forbear to mention that since the silver scares of the Seventies, producers have been squeezing down their silver usage, leaving little room for further reductions.) Another factor contributes to silver's demand inelasticity. Silver usually adds little to the end product's cost, e.g., the silver on a printed circuit board in a computer.

    Precisely because silver demand is inelastic to price and silver is relatively irreplaceable (at least short term), silver is potentially hypersensitive to any sudden supply shortage. That's what still makes it so attractive, even though it has languished comatose so long. Add to that riddles about a very mysterious abundance of supply, and silver becomes even more interesting. I don't regularly see Grant's, but from what I have seen Mr. Kashdan's work doesn't measure up to its usual standards. However, this particular article will certainly help silver investors, since it will keep their numbers small and increase the surprise, and thus the run, of the eventual price explosion.

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.

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