Pedal to the Metal, Silver's on the Rebound

Physician's Money Digest, August 2007, Volume 14, Issue 8

Arecent drop in the price of silver has led some analysts to speculate that this precious metal is no longer a wise investment. But what these analysts have overlooked is that new technological uses for silver will soon boost its value.

Ready for Business

Silver is in tremendous demand as a raw material in industry. It has a unique combination of characteristics that make it ideal for a staggering variety of uses, and the long-term outlook is good. Specifically, silver is primed for enormous long-term growth primarily because of the many new technological uses that have recently developed for this precious metal. Demand for silver is expected to increase exponentially in the following four key technologies:

  • Batteries. New silver-zinc batteries offer up to twice the runtime of lithium-ion batteries, and these new batteries don't heat up or explode.
  • Superconductors. Superconducting power lines, "maglev" trains, and other utility applications could cause a dramatic upswing in demand for silver. The US Department of Energy estimates that, over the next 10 years, superconducting wire might increase demand for silver by 50 million ounces.
  • Microcircuits. New ink-jet circuit printing using silver powder is an exciting new field for creating the ultra-tiny microcircuits that enable computers and personal electronic devices to get smaller and smaller each year.
  • Biocides. Silver's ability to kill germs without harming the human body makes it ideal for use in disinfectants; self-cleaning plastics and coun- tertops; and materials for mold prevention, wood preservation, water treatment, medical uses, food storage, dental hygiene, odor removal, and many other purposes.

Investors should note that current demand for silver is already about 900 million ounces each year, which does not include any of these new technological uses. And the supply of silver is dwindling.

Silver supply can be divided into three main categories: mine production, government sales, and scrap recycling. Of the three, government sales account for only 8% of supply, and are unlikely to increase, since world governments have almost run out of silver to sell. Scrap recycling accounts for about 21% of supply, and should also hold steady.

A Scarce Supply Available

The story gets interesting with mine production, which provides about 70% of the silver supply. Usually, the price of a mine-produced commodity is somewhat self-correcting. The more the commodity's price goes up, the more the mines can produce. With the higher price, low-grade deposits become profitable. As price increases, supply increases, which brings the price back down. This rule doesn't apply to silver. Most silver is produced as a by-product of other mining operations, such as those for extracting copper, lead, and zinc. Even if prices rise, the mines won't necessarily increase silver production. In fact, their production might even decrease, if the price of their primary product falls and they are forced to reduce their operations. Over the next year or 2, silver mining is predicted to grow minimally, by 1% or 2%. Compare that mild increase in supply with the growing demand that is expected to take off, and investing in silver becomes a very interesting prospect. While a few small mining stocks look promising on the surface, they're too high-risk for most investors. Instead, investors should buy into bullion coins, semi-numismatic coins, and genuinely rare numismatic US coins. A few smart investment options include the following:

  • Gem Proof 90% Silver rolls of quarters, dimes, and half dollars from 2002 to 2007.
  • Boxes of 100 Gem Proof Silver Eagles from 1986 to 2006.
  • Choice Uncirculated Rare US Morgan and Peace Silver Dollar rolls.
  • Professional Coin Grading Service (PCGS) or Numismatic Guarantee Corporation (NGC) Graded Morgan Silver Dollars in Gem Uncirculated MS65 and better condition. (It is suggested that you start with Silver US Morgan and Peace Silver Dollars struck from 1878 to 1935 in Gem Uncirculated MS65 or better condition.)

James DiGeorgia is editor and publisher of the Gold and Energy Advisor Newsletter (www.goldandenergyadvisor.com) and the author of the popular books The New Bull Market in Gold and The Global War for Oil.