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February 28, 2006

The Silver Deficit (1942-2004)
by David Zurbuchen

This is the second installment of a planned 7-part series:

Part 1 - The World's Cumulative Silver and Gold Production. Documenting the total amount of silver and gold produced since recorded history.
Part 2 - The Silver Deficit. Documenting the silver production/consumption deficit since 1942.
Part 3 - The Real Silver Deficit. Answering the questions of "How much silver has been consumed by industry?" and "In what potentially marketable accessible forms does it remain?"
Part 4 - The Illogical Performance of the Gold to Silver ratio Since 1848. Looking at silver and gold's production growth since 1848, as well as their shrinking ratio of comparative rarity, and comparing these to their market price ratio for that same period.
Part 5 - Why the Depressed Prices? A brief look at the amount of silver stockpiles held in the early 1900's, and how almost all of it disappeared.
Part 6 - What Happened in 1980? Did production increase? Did extraordinary amounts of scrap silver come to market? -- What to expect in any future stratospheric price rise.
Part 7 - The Future of Silver. An overview of silver's fundamentals with my own short and long-term outlook, including price predictions for 2006 and beyond.

Preface

"Because of the long-term structural deficit in silver, stretching back to World War II, we have consumed inventories for more than 60 years."
-Ted Butler, "The Coming Silver Bubble"

This essay will seek to prove what Mr. Butler and other silver bulls have been confidently asserting for so long, that is, the claim that silver has experienced a supply/demand deficit which stretches back all the way to 1942.

The Silver Deficit

One problem with documenting the silver deficit is that world consumption rates are almost non-existent prior to 1955, at least according to my research. If this data is available, please bring it to my attention.

But despite the lack of official figures, one can know to a fairly accurate degree how much 'deficit' has accumulated worldwide in the years prior to 1955 through the use of some comparative math.

In order to accomplish this, we must first obtain US silver consumption data. Then, in order to determine the total world consumption of silver, we simply find what percentage of the world's consumption the US represented. Luckily, there happens to be a small amount of data pertaining to this subject hidden within the Minerals Yearbook dated 1932-1933.

From the Minerals Yearbook 1932-1933 (pg. 18) we discover that total world industrial and arts consumption of silver was 91.4 million ounces in 1930 and 70.1 million ounces in 1931, whereas US industrial and arts consumption of silver was 36.4 and 33.7 million ounces respectively. Thus, US industrial and arts consumption (not including coinage) amounted to 40.1% and 48.1% of the world's total consumption respectively, or an average of 44.1%. But since these years coincided with the beginnings of the "Great Depression" I thought it would be wise to evaluate this ratio once more at the next earliest point in time where the appropriate data is available in order to formulate a more certain comparison.

By looking at US industrial and arts consumption from 1956-1960, we find that on average the US consumed 96.8 million ounces while the world consumed 211.7 million ounces. Thus, the US represented 45.7% of industrial consumption during this period. Furthermore, from Minerals Yearbook 1958 we read, "the United States Continued to account for virtually half [let's assume 49%] of the free-world consumption of silver (excluding coinage)." This agrees very closely with data obtained from the years 1930-1931. I will therefore be using a median figure of 45% (note that the actual average between the 4 data points -- 40.1%, 48.1%, 45.7%, and 49%-- is 45.55%). I have weighted the average slightly lower for the simple reason that the US appears to have consumed less of the world's total silver supply the further back one goes into the 20 th century. Since we are concerned with the years prior to 1955, this makes good sense.

What this 45% figure means is that I will assume US industrial and arts consumption of silver represented 45% of the world's total in all the years where only US consumption data is known, namely 1901-1954. We can then find the estimated total world industrial consumption during these years by dividing the US consumption numbers by .45 (or 45%).

Finding the total world consumption including coinage also presented a problem due to lack of data between 1901 and 1954. I would like to think I estimated to a fairly accurate degree, but if in fact I have not, I nevertheless remain fairly unconcerned because this value will be shown in Part 3 to be of only minor significance in the quest to obtain the true silver deficit.

Some Important Notes Concerning the Table Shown Below*

*The importance of this information may become more apparent in Part 3 of this series when the total amount of silver consumed by industry is calculated using several methods to account for some of the ambiguity within the Minerals Yearbooks.

1901-1954: It is somewhat ambiguous whether or not world industrial and arts consumption given in the Minerals Yearbooks during this period is a measure of net consumption (i.e. demand- recycled scrap) or simply total consumption regardless of scrap supply. In the years prior to 1955 it seems clear that at least the US numbers do represent net consumption, and using this data I have approximated net world consumption using the 45% US to World ratio obtained above*. Net industrial demand in the words of the Minerals Yearbooks is "silver issued for industrial use minus silver returned from industrial use." Following 1955, US numbers still seem to describe net consumption/demand, but at the same time world consumption numbers are not at all clear. Regarding these issues of misunderstanding, representatives of the United States Geological Survey (USGS) were unable to answer my questions. Therefore, I will evaluate the total silver deficit in Part 3 from several different angles, making use of various combinations of the data sets.

*Approximations were only necessary through the year 1954. In all the years following, with one exception (1994), world demand is known without having to calculate estimates based upon US consumption numbers.

1955-1984: World Consumption totals are free-world only, and are therefore underreported by an estimated 30-60+ million ounces per year based upon an annual production from communist countries of 35-55 million ounces during this period (see the year 1985 in the chart below for reference). This is important because during this same period total world productionadds the estimated production from communist countries into the total, thus explaining why in some years there appears to be no deficit at all when in reality the deficit continued (e.g. 1955 and 1981-1985).

1955-1994: As was alluded to above, total world industrial and arts consumption numbers and total world consumption numbers during this period are somewhat ambiguous, again because they could be representative of either net demand or simply total demand. While the US consumption totals are usually identified as 'net demand' within the Minerals Yearbooks, it is not clear if world demand/consumption totals are meant to mean the same thing, even while the US and world totals are at times described with the exact same wording.

• 'e.' stands for estimated
• All years in RED are years in which there was a worldwide supply/demand deficit (1942-2004).
• Industrial and arts consumption stands for total silver demand (i.e. photography, jewelry, electronics, etc.) minus coinage demand.
• Many years have two quoted values for various calculations, one net (i.e. total demand - scrap) and the other total (i.e. not factoring in scrap supply).

Lastly, I highly recommend you read the quoted material inserted between the yearly data within the following chart . Many gems are enclosed, I assure you of this. One such entry mentions that the US military alone was using silver in over 5,000 different items in the year 1971!

Total World Silver Consumption (1901-2004)
(Reported in millions of ounces, with the exception of the totals)
Source: Minerals Yearbook (1901-1994)
Source: The Silver Institute (1995-2004)

Shown below are two methods of calculating Communist demand of industrial use silver for the period 1939-1984:

• By estimating an additional demand of 40 million ounces per year for this 46 year period and adding it to the total we arrive at 30.1215 billion ounces + 1.84 billion ounces = 31.9615 billion ounces
• By estimating an additional demand of 60 million ounces per year for this 46 year period and adding it to the total we arrive at 30.1215 billion ounces + 2.76 billion ounces = 32.8815 billion ounces

By adding the coinage demand during the years 1901-2004 (an estimated 4.0651 billion ounces) to the previous total of 32.8815 billion ounces we arrive at a grand total demand for silver of 36.9466 billion ounces since the turn of the 20th century.

And there you have it folks. Despite the phenomenal increase in mine production since 1800 (see below), every year since 1942 the world has demanded more silver than has been produced. Therefore, silver has experienced a phenomenal 63 year long supply/demand deficit as of year-end 2004.

Above: www.sharelynx.com

With a total production of 30.7144 billion ounces and a total demand of perhaps 36.9466 billion ounces, an amazing supply/demand deficit of 6.2322 billion ounces has accumulated since 1901.

However, if one begins at the pivot year of 1942, then the total supply/demand deficit is actually the staggering figure of 10.6567 billion ounces, the necessary result of a 63 year supply/demand deficit. The difference between this number and the 6.2332 billion ounce deficit quoted above is due entirely to the mine supply surplus years of 1901-1941.

What Next?

In Part 3 of this series we'll search for the answers to those long pondered questions of old, befuddling great philosophers and thinkers throughout the ages:

• What is the real silver deficit (i.e. how much silver has literally been consumed by industry?)
• Making use of recycling rates for silver in order to determine just how much 'disappeared'.
• How much silver is left above-ground and in what potentially market accessible forms?
• Discovering how much silver has been formed into jewelry, silverware, coins, etc. since 1901 and how much possibly remains.
• Learning what price levels silver must climb to before these forms of silver are likely to be sold in any large quantities back into the market.

Well, okay, so maybe Plato and Socrates didn't lose much sleep over the questions above, but for those invested in silver or merely contemplating it, such may be the case. If so, don't worry, because you'll rest easy soon enough.

A Preview of Part 3:

From the CRA Report: Silver Stocks Around the World
An independent study conducted in 1992 by Charles River Associates

(Totals as of year-end 1991)

Total Silver that remains above-ground (all forms): 19.06 billion ounces
Total Silver contained in silverware and art forms: 16.48 billion ounces
Total Silver contained in bullion form: 1.40 billion ounces
Total Silver contained in coin and medallion form: 1.18 billion ounces

Updating the Data

1992-1994: World mine production of silver during this period totaled 1.373 billion ounces (Minerals Yearbooks)

1995-2004: World mine production of silver during this period totaled 5.639 billion ounces (The Silver Institute)

Total World Mine Production from 1992 to 2004 = 7.012 billion ounces

Combining this number with the CRA Report's estimated total above-ground supply of 19.06 billion ounces, we arrive at 26.07 billion ounces of silver remaining above ground.

Here then is our new gold to silver rarity ratio based solely upon relative rarity. 4.25 billion ounces Au /26.07 billion ounces Ag (see Part 1) = 1 to 6.13 (Gold vs. Silver)

This means that based on relative abundance, silver should be trading at around $91.10/ounce (using a gold price of $558.5)

Please note that this doesn't even take into account the large deficit formed since the CRA Report was conducted in 1992. But we'll deal more with all of this in Part 3. This was just a taste.

I will be using the CRA Report as a yardstick with which to compare my findings in Part 3 of this series. If the numbers are similar, then we can be fairly certain these findings are accurate.

Corrections to Part 1 of this Series:

1. A few mathematical errors were made while tabulating the world's cumulative silver production, and all together these have the effect of raising the average total up from 44.542 billion ounces to 45.552 billion ounces (a 2.3% increase). This also slightly changes the gold to silver ratio of cumulative production, from 1:10.5 up to 1:10.7 (a 1.9% increase).
2. Two very minor mistakes were also made in tabulating the world's cumulative gold production, but even added together they changed the average world total by less than 0.001%.
3. I wrote:

Most would agree that neither gold nor silver is undervalued in terms of the dollar, so the only way to look at this situation is to say that silver is undervalued in terms of the dollar and gold. This means that I expect silver to far outperform any gains seen in the price of gold, even if gold doubles or triples in price within these next 2 years.

This should have read, "most readers would agree that both gold and silver are undervalued in terms of the dollar". In other words, the dollar is overvalued in terms of gold and silver.

David Zurbuchen
silverinscripture.com

Disclaimer: I am not a financial advisor. Information contained within this essay must not be construed as investment advice. Do your own due diligence, because everyone has a bias.

I offer a FREE Silver Stock Investment Newsletter for which you are invited to subscribe. At present, there are over 850 subscribers from 25 different countries. To join, please visit: www.silverinscripture.com.

Copyright 2006 © David Zurbuchen

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