Silver: Gold's Not-So-Ugly Stepsister

Bullion investment now represents a quarter of total world demand for silver. However, while investment demand rose sharply over the past five years, this demand did fluctuate significantly each year. To predict future price moves it is helpful to look at current investment trends and couple this information with demand trends for silver in industry.

The Silver Institute breaks silver investment demand into two useful categories: implied net investment and coins & medals. To simplify, implied net investment represents physical silver bars such as those held by an ETF's custodian. Coins are government minted bullion bearing a denomination with medals being similar but from a private mint and lacking a denomination. 

Investment Demand in Millions of Ounces
  2009 2010 2011 2012
Implied Net Investment 116 158 132 160
Coins & Medals 79 99 118 93
Silver Price $14.67 $20.19 $35.12 $31.15

Source: "World Silver Survey 2013", The Silver Institute

The iShares Silver Trust (NYSEMKT: SLV  ) dominates the silver ETF market with over $8 billion in assets reflecting more than 10,000 tonnes of silver. Because of its size, the Silver Trust provides a good directional proxy to the implied net investment category mentioned above. Additionally, flows are regularly updated at the iShares website. The following chart shows ounces the Silver Trust held in January each of the past four years. Note: the height of holdings was 366 million ounces in April of 2011. Through August of 2013 the Silver Trust held 339 million ounces. This continuation of increased demand seen through 2012 is bullish for silver prices.

iShares Silver Trust Ounces in Millions
Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013
305 351 309 324

Source: "Historical Data", iShares Silver Trust

Silver bullion coins from government mints in the United States (American Silver Eagle), Australia (Kookaburra, Lunar), Canada (Maple Leaf), Mexico (Libertad) and Austria (Philharmonic) lead the coins & medals segment. These coins are generally sold through secondary vendors to retail investors and collectors. Among these coins, the American Silver Eagle is the best directional proxy for demand in this segment representing approximately one third of ounces sold. Additionally, actual sales figures are updated frequently on the United Sates Mint website. The following chart shows American Silver Eagle bullion coin sales during the past four years. Even taking seasonality into account, 2013 should easily be the record year for sales. This return of demand levels seen in 2011 is bullish for silver prices.

American Silver Eagle Sales (One Ounce) 
2010 2011 2012 2013 (YTD)
34,662,000 39,868,500 33,742,000 33,075,000

Source: "Bullion Sales/Mintage Figures", US Mint

Conclusion

SLV Chart

SLV data by YCharts

Bullion investment is a key component of silver demand representing approximately 25% of total world demand. Demand for both silver bullion bars and coins is rising. As a proxy for silver bar demand the iShares Silver Trust provides accurate, timely insight into silver flows. Flows into ETFs turned positive for 2012 and continue to rise. Investment demand for bullion coins is also elevated and has returned to 2011 levels. Record bullion coin demand is evidenced by record year-to-date American Silver Eagle sales.

Increasingly silver is looked upon as precious metal investment in addition to an industrial commodity. Because of this duality it offers an interesting alternative to gold bugs. The following chart depicts the percent change of the Silver Trust versus the SPDR Gold Shares (NYSEMKT: GLD  ) . For comparison the S&P 500 total return is included. Interestingly silver has significantly outperformed gold. Current trends in investment demand point to a continuation of this performance.

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