Your Crash Course in Silver Supply and Demand

While silver and gold prices shake off the summer doldrums and appear set to resume their multiyear advance, let's take this opportunity to delve into key elements of silver supply and demand.

Silver stocks are rapidly waking up from a long and excruciating slumber. Atop a 9% advance for bullion proxy iShares Silver Trust (NYSE: SLV  ) over the past month, popular investment vehicles Silver Wheaton (NYSE: SLW  ) and First Majestic Silver (NYSE: AG  ) have recorded precious surges of 24% and 30%, respectively. But rather than taking my word that far greater gains remain in the cards for these quality silver investments, Fools must analyze for themselves the underlying dynamics of supply and demand before deciding whether they share my bullish outlook.

SLV Chart

SLV data by YCharts

Fortunately, the kind folks at Endeavour Silver (NYSE: EXK  ) have compiled a wealth of information within the company's "Silver Education Hub" to help investors get up to speed on relevant market fundamentals. Following up on prior video installments that detailed the processes behind modern silver exploration and extraction, Endeavour's latest offering covers the basics of silver supply and demand in the first of a two-part series. Click here to watch the following video; it runs about five minutes long, and I consider it well worth your time.

As you have just seen, resilient industrial demand remains a core component of silver price dynamics even as the once-dominant application in film-based photography permanently recedes. As Hecla Mining (NYSE: HL  ) CEO Phillips Baker Jr. discussed with me in this interview earlier in the year, silver's valuable and unique properties make it quite likely that new and unexpected applications for the metal will drive a (very) long-term trend of gathering industrial demand. Already, the decline in film-related demand has been more than offset by silver's use in the solar industry. Other key emerging growth markets include the high-volume application in RFID tags, and the ongoing personal electronics craze for everything from iPads to the latest smartphone offerings.

By far the biggest increase in global silver demand over recent years, meanwhile, has come from silver's time-honored position alongside gold as a vehicle for wealth preservation, particularly through periods of acute financial or monetary distress. Despite a fivefold increase in total investment demand from 2007 to 2010 alone, it may surprise some Fools to learn that total 2010 investment demand of 296.2 million ounces corresponds to a dollar value (at the average 2010 silver price) of just $6 billion. A rogue JPMorgan Chase trader can lose that kind of money in a single quarter!

The modest scale of the silver market overall, in contrast to the unimaginably massive universe of heavily leveraged derivatives that continues to threaten the financial system at large, may offer some context for the gut-wrenching volatility that scares some investors away from silver entirely. For my part, I'm more interested in seeing what the small scale of the silver market will mean for prices in the very likely scenario in which global silver investment demand continues to gather steam. For more on the investment component of the equation, please stay tuned for my next discussion of silver supply and demand by bookmarking my article list or following me on Twitter.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Endeavour Silver, First Majestic Silver, Hecla Mining, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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