Investors need to understand an important fundamental reason why the silver price will explode much higher than gold. While many analysts state several reasons why silver will outperform going forward, I believe one vital fundamental factor is overlooked.
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This critical factor is based upon a certain supply versus demand component of the gold and silver markets. Actually, I came across this data while working on the research for a completely different article. However, the more I compared the figures, the more surprised I was by the results.
One of the important aspects of my work here at the SRSrocco Report is to take data, figures and information and to look at them in a different way than most analysts. By doing this, I can spot interesting trends and factors unnoticed by the majority of analysts.
However, before I get into the critical reason why silver will outperform gold in a big way going forward, let’s dissect some of the underlying factors
THE HUGE DISCONNECT: Silver vs Gold Jewelry Recycled Supply vs Demand
While most investors realize that gold and silver scrap supply are used to help supplement the market, very few understand the huge disconnect between these two precious metals when it comes to recycled jewelry scrap.
First, let’s take a look at silver jewelry scrap supply. According to the Metals Focus: Silver Scrap Report, the world recycled approximately 551 metric tons (mt) of silver jewelry in 2015. This may seem like a substantial amount until we compare it to total world silver jewelry demand of 7,045 mt:
Thus, recycled silver jewelry supply of 551 mt accounted for only 8% of global silver jewelry demand in 2015. Why so little? Because, very few people will take the time to go down to a pawn shop or precious metal dealer and sell a couple of pieces of silver jewelry for a few bucks. It’s just not worth the effort.
This is the very reason why very little silver jewelry is recycled. However, gold jewelry is a much different animal all together. Matter-a-fact, the majority of global gold scrap supply comes from recycled gold jewelry. It was difficult to obtain the data on global gold jewelry scrap supply, but I was able to provide an approximate figure based on the data in the Metals Focus: 2015 Silver Scrap Report:
The recycling of silver from old jewelry makes up the second smallest category of silver scrap supply. Its limited scale is also marked in comparison to gold; silver jewelry fabrication may be more than double gold by weight, but its jewelry scrap is less than half gold’s. These modest numbers for silver are largely due to the small amounts typically sold back by consumers as the low value per item means there is little incentive to sell.
Second, according to data from the World Gold Council’s Full Year Demand Trends, and based upon my calculations, global gold jewelry scrap supply was approximately 1,000 mt versus 2,415 mt of total gold jewelry demand in 2015:
Thus, global gold jewelry scrap supply comprised 41% of total gold jewelry demand in 2015. This is an astonishing figure as gold jewelry scrap supply versus gold jewelry demand is five times greater in percentage terms (41% gold vs 8% silver) than its silver counterpart.
Again, this is due to the fact that gold jewelry owners are well rewarded for their time to sell a few gold rings for say $500-$1,000 versus $5-$15 for several pieces of silver jewelry (based on metal content only).
NOTE: The data in the Metal Focus: Silver Scrap Report states that silver jewelry scrap was less than half of gold jewelry. Unfortunately, this is where I had to make an adjustment and estimation. The World Gold Council states that total gold scrap supply in 2015 was 1,093 mt. Half of that would be 545 mt. This is less than the 551 mt reported by Metal Focus for silver jewelry scrap supply. Not all of global gold scrap supply comes from jewelry. Some may come from recycled industrial scrap and old gold coins and bars.
This is why I provided the estimate of 1,000 mt for global gold jewelry scrap supply in 2015. Furthermore, each official reporting source may publish different statistics for the same data which makes it difficult to provide exact figures. So, it is important to look at the overall trend and not to waste time focusing on exact measurements or data.
Now that we have an idea just how out of balance silver jewelry scrap supply is compared to gold jewelry scrap, let’s look at pathetic figures in the next component.
The Majority Of Industrial Silver Demand Is Not Recycled
One of the things I hear a lot thrown around the precious metals community is the figure that 50% of silver demand is lost forever. This is due the huge consumption of silver by industry. However, the real figure is much larger. I’ll get to that in a moment, but let’s first look at how little of industrial silver is recycled on an annual basis:
Well, if we go by the figures in the 2016 World Silver Survey and Metals Focus: Silver Scrap Report, global industrial silver scrap was approximately 3,266 mt in 2015 compared to the massive 18,311 mt of world industrial silver demand. Which means, global industrial scrap supply only accounted for 18% of world silver industrial demand in 2015.
I have decided to convert some of these figures in troy ounces for new folks in the gold and silver industry:
Silver Jewelry Scrap vs Demand 2015: (metric ton = mt) (million oz = Moz)
Silver Jewelry Scrap of 551 mt = 17.1 Moz
Silver Jewelry Demand of 7,045 mt = 226 Moz
Gold Jewelry Scrap of 1,000 mt = 32 Moz
Gold Jewelry Demand of 2,415 mt = 78 Moz
Silver Industrial Scrap of 3,266 mt = 105 Moz
Silver Industrial Demand of 18,311 mt = 598 Moz
Several of my readers have contacted me asking me to present the figures in only one standard to make it easier for individuals (especially new investors) to understand. Unfortunately, private and government sources report their data in either metric tons or troy ounces. Even though it would be convenient to only publish my data in one standard, TROY OUNCES for example, readers would be lost when they come across tables or reports that are published in metric tons. So, I try to convert figures as much as possible. And if I don’t, remember this conversion:
[1 metric ton = 32,150 troy ounces]
Okay… if you are beginning to understand how little silver is recycled in the jewelry or industrial markets, wait until you see the TOTAL PICTURE.
A Hell Of A Lot More Silver Is Lost Forever Than Originally Thought
If we compare global silver scrap supply versus total demand compared to the gold market, the figures are like NIGHT & DAY. In 2015, the world recycled 4,665 mt of silver, while total demand was a staggering 36,423 mt. Thus, only 13% of total world silver demand was recycled last year. This is one hell of a lot less than the 50% figure repeated by the precious metals community.
While it’s true that physical silver investment demand is a significant portion of total demand, much of that will never be recycled. This is true for Official Silver coin sales which reached 134 Moz in 2015 (4,168 mt). Regardless, some of Silver Bar & Coin demand will be recycled, but it’s the smallest segment of the silver scrap market.
According to the Metals Focus: Silver Scrap Report, only 6 Moz (186 mt) of silver coins were recycled in 2015. And, the majority of that amount came from unsold European commemorative silver coins minted years ago.
So, how does the gold scrap market compare to silver recycled supply? In 2015, global gold scrap supply was 1,093 mt versus total world demand of 4,253 mt:
Here we can see that global gold scrap represents 26% of total gold demand. This is double the percentage of silver. Only 13% of total silver demand was recycled last year. However, these percentages don’t really paint the true picture.
Global Gold-Silver Demand Minus Scrap Supply 2015
Gold Demand – Gold Scrap = 3,160 mt
Silver Demand – Silver Scrap = 31,718 mt
If we compare total demand minus scrap supply, there is ten times more silver demand that is not recycled compared to gold (silver = 31,718 mt vs, gold = 3,160 mt). Which means, there is a hell of a lot less silver available to the market than gold…. in percentage terms
Furthermore, the majority of gold bullion, jewelry and coins still remain in the world compared to silver. If we assume that most of silver jewelry and industrial demand is not recycled, then this is truly lost forever unless the silver price surpasses $200-$300.
When the world wakes up the fact that they are invested in PAPER ASSETS that have no future, the mad rush into physical precious metals will push the value of silver up much higher than gold. As these charts show, a great deal more gold is recycled compared to its total demand than silver.
Which means, a lot more than 50% of silver demand is lost forever. Actually, if we go by the data, only 13% of total world silver demand came from recycled silver supply in 2015 while 26% came from gold. Thus, 87% of total world silver demand did not come from recycled silver supply.
Yes, it’s true that in 2011, silver scrap supply increased due to the high annual average price of $35. Even though total scrap supply increased to 6,430 mt (206 Moz) in 2011, it still only represented 20% of total silver demand that year. I am using the 206 Moz figure from Metals Focus: Silver Scrap Report rather than the 260 Moz figure reported by the World Silver Surveys because the Metals Focus group went back and did a much more detailed job researching scrap and found out that the market had overstated scrap supply for several years. I will be writing about this shortly.
Regardless, even at a much higher price of $35, only 20% of the total silver demand in 2011 came from silver scrap supply. Which means the world lost 80%, more than the 50% figure repeated by the precious metals community.
Furthermore, if we just add up all the silver jewelry produced for the past decade it equals 60,500 mt or 1.95 billion oz. Let’s say a conservative average of 10% of this silver jewelry was recycled (remember only 8% was recycled in 2015). That means only 6,050 mt of silver jewelry was recycled since 2006. Thus, nearly 54,500 mt or 1.75 billion ounces was lost to the market. Only at much higher silver prices will some this silver jewelry come back on the market as scrap supply.
Precious metals investors need to understand that the majority of manufactured silver will never come back on the market until we see insanely high prices. However, at that point… it won’t matter. There still won’t be enough silver to meet demand as mainstream investors stampede out of worthless paper assets and into physical precious metals.