What's Going On with Gold? Understanding Demand and Supply
(Continued from Prior Part)
Growing industrial demand
The demand for silver for industrial purposes has been on the rise since 1987. The demands went beyond the supply in 1990. Since then, the deficit in production has been met by commercial depositories and individuals who stock silver in their households.
Despite the shortfall in silver, we’ve seen prices drifting lower. Silver prices have fallen close to ~7% on a year-to-date basis. Silver closed at $14.65 per ounce on September 10, 2015.
Tracking silver ETFs and miners
Silver ETFs such as the iShares Silver Trust, which tracks its performance based on silver, has fallen ~8% on a year-to-date basis. The Global X Silver Miners ETF (SIL) has comparatively lost more, falling a whopping ~33%.
Silver mining companies have also fallen. Equities such as Pan American Silver (PAAS), Hecla Mining (HL), and Silver Wheaton (SLW) have risen significantly. HL, PAAS, and SLW contribute significantly to the Market Vectors Gold Miners ETF (GDX).
Silver stocks go down in COMEX warehouses
Silver stocks in COMEX (Commodity Exchange) warehouses have gone down almost a third since 1990. Stockpiles in warehouses of other exchanges worldwide have also dropped. The CPME (Chicago Precious Metals Exchange) estimates reported and unreported silver stocks close to 410 million ounces.
Silver was once thought to be unlimited in supply. However, the notion no longer holds ground. We currently have a production deficit of as much as 111 million ounces, averaging from the year 1990. After analyzing the supply side, it’s easy to understand why Warren Buffet has invested $680 million in silver.
Production deficits may push the prices of silver and silver-backed ETFs higher as lower supply leads to a surge in the price of the commodity. The rise in price may result in the mining of lower grade ores that are economical for extracting silver. Other options are to reduce the consumption of silver and keep it for more efficient uses or find an alternative to silver for most industrial applications. However, the deficit may continue, as increasing production and reducing consumption are both complicated procedures.
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