News Analysis date published New: 
Tuesday, December 20, 2011 - 11:00
New Date created: 
Wednesday, December 21, 2011 - 14:06
New Date last updated: 
Tuesday, December 20, 2011 - 11:00

Are You Ready for "Peak Silver"?

Tuesday, December 20, 2011 11:00 AM

We've all heard of peak oil -- the notion that, because there's a finite oil supply, production will one day begin to progressively diminish until there's no oil left. Well, a similar thing may be happening with silver, one of the world's most desired precious metals. That's why we at StreetAuthority think silver may be one of world's most coveted investments in the coming months and years.

Investors have been flocking to this metal for safety, just like gold. But that's not the only thing behind the high demand, which has been so great some experts say supplies could actually run out completely in only nine years. Industry has been gobbling silver up, too.

Think about it. Silver is a crucial component in so many items considered essential to modern life. It's in our flat panel TVs. It's in our iPhones. It's also in solar panels, the use of which has climbed by more than seven-fold in the past decade. All told, demand for silver in consumer electronics has more than doubled in the past 12 years. Total industrial demand is forecasted to rise to 666 million troy ounces per year by 2015, nearly a 40% jump from today's level of industrial use.

Whether peak silver will actually come to pass is anyone's guess. It's just too difficult to predict these sorts of events with any kind of accuracy. But one thing seems certain: at this point, there isn't enough silver to go around, and it doesn't look like there's going to be any time soon. The chart below provides an excellent illustration of this.

As the chart shows, total demand for silver -- the amount demanded by investors and industry -- has long outstripped what mining companies have been able to produce. This year, the estimated shortfall is about 120 million ounces, the difference between the 900 million ounces demanded and the 780 million ounces the mining industry will be able to supply. In other words, according to the chart, silver has been scarce for more than a decade, even though miners ramped up production 30% during that time.

Sounds pretty dire, doesn't it? We could be facing an ongoing silver shortage or maybe even a peak-silver situation that plays out within a decade. It all depends on how you look at it. For investors, it could mean a long and profitable bull market in silver, since shortages typically mean higher prices in the long-term.

After all, there's usually enough scrap silver -- silver typically reclaimed from objects such as old silverware, coins, jewelry and even lithographic ink and X-ray films -- to make up the shortfall. But this may not be the case for much longer. These traditional sources of scrap are rapidly depleting, and it's much harder to reclaim silver from newer sources like solar panels and electronic devices such as TVs, cell phones and computers. In the case of solar panels, a big obstacle is the extremely long wait until scrap can be reclaimed, since solar panels usually last at least two or three decades. There's a general lack of efficient methods to recover scrap silver from electronic devices, at least half of which end up in landfills anyway.

Risks to Consider: Like most precious metals, silver can exhibit extreme price volatility in the short-term.

Action to Take--> With this in mind, you may want to consider adding silver to your portfolio, particularly since the metal is only trading roughly $30 an ounce, about 40% off from its April levels. How high silver goes from here is anyone's guess, but experts such as Nathan Slaughter, Chief Investment Strategist of StreetAuthority's Scarcity & Real Wealth are convinced we're in the early stages of a bull market in silver.

There are several ways you can gain exposure to silver. You can buy shares of silver miners such as Silver Wheaton (Nasdaq: SLW) or Cour 'd Alene (NYSE: CDE). (We've talked about Silver Wheaton's particularly unique business model before.) You can even buy exchange-traded funds (ETFs) that physically store gold bullion for you.

It would be prudent to devote a significant portion of your silver holdings to physical silver. This way, you'd have some of the actual metal on hand in the event of a peak silver situation where mining stocks were no longer good investments due to a large decrease in silver production. That's why our favorite way to own silver right now is to own silver bullion or coins. [For more on why we think this is the way to go, read this article.]

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.