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Silver Is in Short Supply: Will This Cause Bottlenecks?

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Sep. 16 2015, Updated 12:11 p.m. ET

Silver in short supply

In the past, commodities in short supply have led to bottlenecks as demand surges. In 2014, silver prices fell 20%, closing at $15.70. In 2013, silver prices fell 36%, exceeding the losses for gold and other precious metals. Silver’s current losses are close to 2.2% on a 30-day trailing basis. The current price of silver futures is lurking close to its five-year low of $14.50 per ounce.

Silver futures for September expiry on COMEX (Commodity Exchange) were trading at $14.70 as of September 3, up 0.27%. On September 1, silver rose 3.9%. Other precious counterparts like the platinum and palladium futures fell 0.35% and 0.31%, respectively, on September 3.

Leveraged silver ETFs like the ProShares Silver Trust (ACQ) have performed better than the Global X Silver Miners ETF (SIL), which fell about 7.27% on a five-day trailing basis. ACQ fell only 0.23% on the same five-day trailing basis.

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Silver demands increase as production decreases

China, who used to export approximately 100 million ounces of silver annually, now imports it. Total US 1Q15 silver imports are up 531 metric tons from last year. Additionally, India’s demand for silver has surged, and the country has purchased 40% of the world’s newly mined silver. Finally, sales of Silver Eagle coins reached 43 million in 2014.

On the production side, however, the world’s largest silver producer, Mexico, decreased production by 12% from 484 metric ton in April 2015. This compares to 426 metric tons in April 2014.

Inelastic industrial demand for silver

A substantial chunk of the demand for silver comes from the manufacturing of industrial products. The demand is price inelastic, as a minuscule portion of silver is employed compared to the relative sales prices of the resultant industrial goods. The same holds true for many electronic and medical applications. Even if silver prices shot up to 20 times their current price levels, industrial demand for silver may hold steady.

Higher precious metals prices, however, would have a drastic effect on jewelry and silverware. Silver is the main raw material in both products, and higher silver prices would most likely draw down demand.

Silver mining companies like Hecla Mining (HL), Pan America Silver (PAAS), and First Majestic Silver (AG) have all lost significantly on a year-over-year basis. These companies comprise 3.7% of the VanEck Vectors Gold Miners ETF (GDX).

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